Trading in options is trading in contracts and, like any contract, an options contract has terms that both the buyer and the seller must agree upon in order to execute the trade.  The standardized terms that govern option contracts specify the four key elements that define a particular contract and distinguish it from all other options traded on an options exchange.

Underlying Stock
Each option contract covers one and only one stock.  Not every stock has options available on it but every option relates to the stock of a single corporation for the duration of the contract.  However, multiple option contracts can exist on the stock of a single company.  Those contracts will each have different attributes (covered below) governing them but they belong to the same “class” of options in that they all cover a specific stock.

Option Type
An option is either a put option or a call option.  A put option gives the option buyer the right to sell 100 shares of the underlying stock to the person selling the contract while a call option gives the buyer the right to buy 100 shares of the underlying stock from the option contract seller.  You can both buy and sell puts and calls and which option you choose depends on how you expect the price of the underlying stock to move.  Call buyers and put sellers expect the underlying stock to rise in value while call sellers and put buyers expect the price to fall.

Expiration Date
An option contract is only in effect for a few months and the expiration date specifies the last day on which an option can be “exercised” by the buyer.  When the option contract is exercised, the option buyer is “exercising” his right to have the option seller fulfill the contract.  The seller must, at that point, engage in a trade to buy or sell 100 shares of the underlying stock with the option buyer.

Strike Price
The strike price is the specific and fixed price at which the trade made upon option exercise must be executed.  This price is set when the option contract is opened and is divisible by 2.5 for stocks trading at under $30 and divisible by 5 from stocks trading above $30.  It’s the strike price that determines whether or not it makes sense for the option buyer to exercise the contract as the difference between the option’s strike price and the current share price of the underlying stock determines if and how much the buyer will profit by exercising the contract.

Beyond these four terms that must be specified and agreed upon for a buyer and seller to open an option contract, everything else is based on the opinions of both parties about the risk of entering into the contract in the first place.  These for elements of the option contract combined with trader belief about which direction and how much the share price of the underlying stock is likely to move before the expiration date arrives is what drives the market for options trading.