Business and Personal Finance Dictionary

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• OPTION
  
  Buying an option gives you the right to buy or sell a specific investment at a specific price, called the strike price, during a preset period of time. If you buy an option to buy, which is known as a call, you pay a one-time premium that's a fraction of the cost of the actual transaction. For example, you might buy a call option giving you the right to buy 100 shares of a particular stock at a strike price of $80 a share when that stock is trading at $75 a share. If the price goes higher than the strike price, you can exercise the option and buy the stock, or trade the option to someone else at a profit. If the stock price doesn't go higher than the strike price, you don't exercise the option, and it expires. Your only cost is the money that you paid for the premium. Similarly, you buy a put option, which gives you the right to sell the underlying investment to the person who sold the option. In this case, you exercise the option if the market price drops below the strike price. In contrast, if you sell a put or call option, you collect a premium and must be prepared to buy or sell the underlying investment if the investor who bought the option decides to exercise it. You can buy or sell individual stock options, stock index options, and options on futures contracts, currency, and Treasury securities interest rates.
  
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