An 'option' is the right to buy or sell a given commodity at a fixed price at a fixed future date. There are two types of options, Call Options and Put Options.

Buying a Call Option involves paying a premium for the right (NOT the obligation) to buy a commodity at a fixed price at a fixed future date. People who buy call options believe the price of this commodity will strongly increase in the future.

For example, suppose Company X has shares/stocks worth $50. You believe these will trend upwards strongly, and will be worth $60 in 6 months' time. You then go out and buy a call option, paying a premium for the right to buy 100 Company X shares at $50 at a date 6 months in the future.

If you are correct and the shares do increase to $60 over the next 6 months, you have two choices:

a) Exercise your right to buy the 100 shares at $50, and then sell them at the market value of $60 each. Congratulations, you've made a profit of $1000 minus the cost of buying the call option.

b) As the share price trends upwards, the value of the call option increases. Instead of buying the shares, you could sell your call option to someone else for a much higher price that what you paid for it, and make your profit that way.

If you are incorrect and the shares do not increase, your call option is essentially worthless, and you make a loss corresponding to the cost of the call option.

Buying a Put Option involves paying a premium for the right (NOT the obligation) to SELL a commodity at a fixed price at a fixed future date. This is the opposite of a Call Option, and would be used when you expect the price of something to trend downwards strongly.

In the example above, Company X's shares are at $50 but you expect them to fall to $40. So you'd buy a Put Option instead of a Call Option. If the shares did trend down, you'd buy at the lower market value ($40) and sell at $50, or on-sell the Put Option, to make your profit.