Options

• There are two species of options: commercial options, which can be freely traded as investments on financial markets, and employee stock options, which are nontransferable and give employees the opportunity to buy company stock at below market price. A commercial options contract can be either a put (right to sell) or a call (right to buy). The price per share written into the contract is called the strike price and is almost always the market price of the shares on the day the contract was signed.
  
  

Trading Options

• An options contract can be traded until the expiration date, at which point the holder can use the contract to buy or sell shares, or let the contract expire. Options are part of a class of securities known as derivatives, which means that the contract derives its value from the shares that it references, but investors trade the options contract independently from those shares. Most investors conduct trades online through licensed brokers that place their clients' orders online as well, though some licensed broker-dealers trade at exchanges.
  
  

Speculating

• Options traders attempt to profit from buying and selling options contracts, speculating on how share prices will rise or fall (for example, if Google shares have been rising steadily but an options trader expects the price to fall in the next six months, she can buy a six-month put option for shares at the current price and make a profit by reselling the option to someone holding devalued Google shares six months later). Options traders speculate to profit off share price fluctuations without actually buying shares.
  
  

Hedging

• Individual investors and investment institutions increasingly use options to hedge their investments (hedging is market activity that protects investments from fluctuations). Investors buy contracts that give them the right to sell their shares at a given price. If the market price rises, the investor lets the contract expire, losing only the relatively low cost of the contract. If the market price drops, the investor cuts losses by selling at the contract price.