option investment & finance definition

A contract that gives the buyer the right to purchase (call) a security from the option writer or to sell (put) a security to the writer. A writer is the investor who creates the option, hoping to profit from the premium that the purchaser pays. An option specifies a price at which the option can be executed (called the strike, or exercise, price), and a time period during which the option is valid. Exchange-traded options have standardized terms, while those traded between individuals are customized. Options provide a type of insurance for investors who want to lock in a maximum price that they can buy a stock or other investment for or a minimum price at which the stock can be sold.