In today's investing world, the word options refers to puts and calls. Options are created not by corporations but by investors seeking to trade in claims on a particular common stock. A call (put) option gives the buyer the right to purchase (sell) 100 shares of a particular stock at a specified price (called the exercise price) within a specified time. The maturities on most new puts and calls are available up to several months away, although a new form of puts and calls called LEAPs has maturity dates up to a couple of years. Several exercise prices are created for each underlying common stock, giving investors a choice in both the maturity and the price they will pay or receive.

Buyers of calls are betting that the price of the underlying common stock will rise, making the call option more valuable. Put buyers are betting that the price of the underlying common stock will decline, making the put option more valuable. Both put and call options are written (created) by other investors who are betting the opposite of their respective purchasers. The sellers (writers) receive an option premium for selling each new contract while the buyer pays this option premium. Once the option is created and the writer receives the premium from the buyer, it can be traded repeatedly in the secondary market. The premium is simply the market price of the contract as determined by investors. The price will fluctuate constantly, just as the price of the underlying common stock changes. This makes sense, because the option is affected directly by the price of the stock that gives it value. In addition, the option's value is affected by the time remaining to maturity, current interest rates, the volatility of the stock, and the price at which the option can be exercised.

Puts and calls allow both buyers and sellers (writers) to speculate on the short- term movements of certain common stocks. Buyers obtain an option on the common stock for a small, known premium, which is the maximum that the buyer can lose. If the buyer is correct about the price movements on the common, gains are magnified in relation to having bought (or sold short) the common because a smaller investment is required. However, the buyer has only a short time in which to be correct. Writers (sellers) earn the premium as income, based on their beliefs about a stock. They win or lose, depending on whether their beliefs are correct or incorrect.