Betty Liu, Executive Vice Chairman for NYSE Group, explains:
What is options trading and how does it work?
So, options are financial instruments that derive their value from the underlying securities, such as individual stocks. Options investors can buy or sell the underlying security at a specific price before that contract expires. So, options where you can buy a specific security or underlying security are called "call options." Options where you can sell that underlying security are called "put options. Now you can trade these options, you can let them expire, and you can buy and sell them.
How do investors use options?
So, there are numerous options trading strategies, and they can be pretty complex for a beginning investor. But generally speaking, there's two ways that you can use options. So, one is pretty obvious, right - You can use them to seek maximum investment gains. The second one is to hedge against losses - You use these options to do that. And in fact, that's a really common way to trade options is to hedge against those future, against losses.
