What Is an ‘Option’ in the Context of Financial Derivatives?

An option is a financial derivative contract that gives the holder the right, but not the obligation, to buy (call) or sell (put) an underlying asset at a specified price (strike price) on or before a specified date (expiration date). The seller of the option is obligated to fulfill the transaction if the holder chooses to exercise the right.

It is a tool for speculation or hedging.