An option is a contract. When we enter into this contract, we have the opportunity to buy or sell stocks at a specific price, called the “strike price.” We are not obligated to exercise the contract. This is why it is called an option. However, if we choose to exercise it, we must do so before the “expiration date.”
There are two types of options – “calls” and “puts.” A “call option” gives us the opportunity to buy underlying shares at the strike price. As the underlying share value increases, our call option value will increase as well. A “put option” allows us to sell the underlying shares at the strike price. So as the underlying share value decreases, a put option’s value will increase.