what is an options contract 
an options contract is a financial agreement that grants the buyer the right but not the obligation to buy or sell a particular asset like a stock at a preset price within a given period as financial markets have grown increasingly complex and at times more volatile options have emerged as a potent way to guard against uncertainty and capitalize on price changes in just a couple of decades options with their ability to leverage gains manage risk and strategic flexibility have moved from an esoteric tool for professionals into a mainstream vehicle from individual investors to large institutional players many market participants use options for speculation hedging and generating income the numbers tell the story trading volume in options has increased by about 150 in the past decade and about 15 fold since 2000 the vast increase in options trading has been helped by a massive spike in retail investor interest which peaked at almost 50 of all trading volume during the pandemic and has remained in the low 40s by percentage for most months since 1below we take you through what you need to know about these contracts how they work who trades them and why and the advantages and pitfalls to avoid should you add them to your trading strategy understanding options contractsoptions contracts are valued based on the underlying securities these contracts allow the buyer to buy or sell depending on the type of contract they hold the underlying asset at a price set out in the agreement either within a specific time frame or at the expiration date the underlying assets include currencies stocks indexes interest rates exchange traded funds and more 2the terms of option contracts specify the underlying security the price at which that security can be bought or sold the strike price and the expiration date of the contract for stocks a standard contract covers 100 shares but this number can be adjusted for stock splits special dividends or mergers options are generally used for hedging purposes but can also be employed to speculate on price moves the contracts generally cost a fraction of what the underlying shares would options can provide leverage meaning that the premium allows you to be exposed to a larger position of shares for a fraction of the cost of buying the underlying security in exchange for this right the buyer of the option pays a premium to the party selling the option options strategies are adaptable to various market conditions traders buy or sell options contracts based on whether they are bullish or bearish on the underlying asset and they often use strategies that combine several options and long positions owning the asset outright at once 3types of options contractsthere are two types of options contracts puts and calls both can be bought to speculate to profit on price changes or hedge exposure that is to insure positions you already have or may have they can also be sold to generate income 4in general call options can be bought as a leveraged bet on the appreciation of a stock or index while put options are purchased to profit from price declines the buyer of a call option has the right but not the obligation to buy the number of shares covered in the contract at the strike price put buyers meanwhile have the right but not the obligation to sell the shares at the strike price specified in the contract 2option sellers known as writers are obligated to perform their side of the trade if the buyer decides to execute or assigns the call option and buy the underlying security or execute a put option to sell here s how it occurs 