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What is a stock option contract?A stock option contract is a legal contract giving the holder the right, but not the obligation, to buy or sell a quantity of stock at a set price (the strike price) on or before a predetermined date (the expiration date). This contract obligates the seller or writer to meet the terms of the contract if the option is exercised by the holder.Stock options can be bought as a hedge against loss if you’re nervous about a stock dropping. For example, you have a stock that you are concerned about dropping. You could buy a put option at or just below the market price, and if the stock does fall, you can exercise the option and sell at the higher price. Stock options can also be used a number of different ways as an investment strategy to attempt to profit from the price movement of the underlying stock.
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