What is a stock option?

A stock option is a right or obligation to buy or sell an underlying stock at a specified price until a specified expiration date. There are two main types of stock options: calls and puts. A call option gives the holder the right to buy the stock, while a put option gives the holder the right to sell the stock. When buying an option, the holder has the right to exercise the option but faces limited potential losses, whereas when selling an option the seller faces an obligation but has potential gains in two directions. The decision to buy or sell an option depends on one's market outlook - calls are used to bet on a stock rising, puts on a stock falling.