An option is a financial contract that gives the buyer the right, but not the obligation, to buy (call option) or sell (put option) an underlying asset at a predetermined price (strike price) before or on a specific expiration date.
Call options are purchased when an investor believes the asset's price will rise, while put options are bought when a decline is expected. For example, if you buy a call option for a stock at a $50 strike price and the stock rises to $70, you can exercise the option to buy at $50 and profit from the difference.
Options are versatile instruments used for speculation, hedging, and income generation. However, they can be complex and carry the risk of losing the entire premium paid. Understanding options is essential for advanced investment strategies.