These contracts are standardized, meaning they control a fixed amount of shares and expire at the same time. Because of this standardization, they are traded on an exchange, just like shares of stock. The contracts are usually highly liquid, which means there are many buyers and sellers standing by who are willing to buy or sell. You can buy an option contract with the same speed it takes you to call your broker and buy stock.

There are two types of options: calls and puts.

Long Call Options

A call option gives the owner the right, but not the obligation, to buy stock ("call" it away from the owner) at a specified price over a given time period.

In trading lingo, any asset that you buy is called a longposition. If you buy a call option, you are the owner, and are long the contract. Notice that the owner, the long position, has the right, but not the obligation, to buy stock. You are allowed to purchase the stock for a fixed price, but are not required to do so. In other words, you have the option to buy -- which is where these financial assets get their name.

The price at which you can buy the stock is called the strike price, which is kind of a slang term that came into use, because that's the price where the deal -- the contract -- was struck. Generally, each contract controls 100 shares of stock, called the underlying stock, which we will talk more about later. For now, just understand that unless otherwise stated, each contract controls 100 shares.