A stock option is officially defined as "a contract that gives the owner the right, but not the obligation, to buy or sell a particular asset at a fixed price for a specific period of time."

The definition may be more simply stated that a stock option is the right to buy and sell a given stock for a known period of time.

One option contract is the right to buy or sell 100 shares of a stock. So 5 options would be the right to buy or sell 500 (5×100) shares of stock at a fixed price in a specified period.

For example, in July a bar owner anticipates that the price of beer from a popular local brewer currently selling at $5 a gallon will increase just prior to and during Oktoberfest. So, she buys the rights to purchase 100 gallons of that beer in September at $5 a gallon from the brewer.

Come September, if the price of the popular local brewer's beer goes up to $6.25 per gallon then our bar owner would be quite pleased. However, if the price falls to $4.90 per gallon, then she is not obligated to buy any of that beer for $5 a gallon. She has only paid for the rights, or the option to make a purchase and she is under no obligation to actually buy anything.

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