What are options?

An option by definition is a contract between two parties allowing one party(Holder) the right to buy and sell a security and the other party(Writer) the obligation to fulfill the order by physical shares or cash. There are two types of options Calls and Puts, both of them have two parties involved a Writer and a Holder. The table below illustrates who has the right and who is obligated in an option contract:

Options Basic
Option Type Writer Holder
Calls Obligation to Sell Right to Buy
Puts Obligation to Buy Right to Sell

The Writer is selling the option to generate income.

The Holder is buying the option to hedge their investment from a downturn or for a speculation bet regardless of direction.