In a Nutshell: An option is precisely that: it’s a contract that gives you the option, though not obligation, to buy or sell a given security by a given date at a pre-determined price.

Definition: Options are “derivative” securities, which means they get their value (or risk of loss) as a “derivative of”/from some underlying instrument, typically a stock or index or currency. An option takes the form of a contract in which the buyer of the contract pays a premium, and for that premium has the further right (or “option”) to buy or sell the underlying security in the contract within a specific time frame and at a specific "strike" price.
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There are two key types of option contracts: “calls” and “puts.”

• A call option is a bet that a given security is going to go up in value and buyers of call contracts (“going long” calls) are therefore optimists.
• A put option is a bet that a given security is going to go down in value and buyers of puts contracts (“going long” puts) are therefore pessimists.

A Call-Option Example: You (are bullish) and believe the price of Stock A is gonna skyrocket. Today, it’s trading at $10.00 a share. But you don’t want to just buy the stock and wait for it to go up. In fact, you’re perhaps even a bit nervous it might go down. So rather than commit $10.00 to buying the stock outright, you decide to buy a “Call Option” on it for $1.00 (the “premium”) which gives you the right to buy Stock A for $10.00 in the next 60 days. So if the stock goes up in value to $20.00 a share in the next 60 days, you’re able to buy something now worth $20.00 for $10.00. You’re a winner of the options game!!! If, however, the price of Stock A had instead fallen to $5.00 a share, then you would obviously never exercise the call option to buy it for $10.00. Instead, you would just let your option expire and all that you lost for this unwanted fall in the stock price was the premium you paid for the contract ($1.00), rather than a 50% loss from the price decline of the stock itself.

A Put-Option Example: You (are bearish) and believe the price of Stock A is gonna tank downward. Today, it’s trading at $10.00 a share. But you don’t want to take on the cost/risk of just shorting the stock (i.e. betting against it) and wait for it to fall. In fact, you’re perhaps even a bit nervous it might go up in value and put you in a “short squeeze”(this occurs when a stock you are “shorting”/betting against goes up rather than down in value and you lose money as a result). So rather than short the stock outright, you decide to buy a “Put Option” on it for $1.00 (the “premium”) which gives you the right to SELL Stock A (to the issuer –or “underwriter”--of the put) for $10.00 in the next 60 days. So if the stock goes down in value to $5.00 a share, you’re able to sell something now worth $5.00 for $10.00. You’re once again the winner of the options game!!! If, however, the price of Stock A had instead rose to $15.00 a share, then you would obviously never exercise the put option to sell it for $10.00. Instead, you would just let your option expire and thus all that you lost for this unwanted rise in the stock price was the premium you paid for the contract ($1.00), rather than a 50% loss from the price appreciation of the stock itself.

Advantages: Leverage. Options allow you to bet for or against a given security without having to purchase the entire security at full price; instead, you can buy an “option” to buy or sell that security at a later date if and when the value of it makes sense to do so; if the value is not there, all you lose is the premium price you paid for this option. Because an option’s cost is normally much less than the cost of the underlying security’s cost (i.e. the cost of a particular stock, bond, etc.), option contracts provide instant leverage. That is, relatively little money allows an investor control over an investment that would otherwise require a much greater capital contribution.
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Risks: The main risk of options is the risk of loss of premium in the event a call or put contract you purchased did not work out by the expiration date of the contract.