A stock option is a contract. It gives the owner the right, but not the obligation, to buy or sell a specific stock at a set price, for a limited amount of time. Think of it like a coupon for a stock. You can use it if it saves you money, but you don't have to.

Every option contract deals with a specific stock, like Apple (AAPL) or Tesla (TSLA). These contracts are standardized, typically representing 100 shares of the underlying stock. There are two basic types of options you can buy.

The two flavors of options are calls and puts. They are opposites.

You buy a call option when you think a stock's price is going to go up. It lets you lock in a purchase price now, hoping the market price will soar past it. If it does, you can buy the stock at a discount.

You buy a put option when you think a stock's price is going to go down. A put acts like insurance. It lets you lock in a selling price. If the stock's market price tumbles, you can still sell it at your higher, locked-in price.

Every options contract has three key components you need to know.

This is also known as the exercise price. It's the price that the whole contract is built around. For a call option, a strike price of $100 means you have the right to buy shares at $100. For a put option, it means you have the right to sell shares at $100.

Options don't last forever. The contract is only valid until its expiration date. After that, it's worthless. The timeframe can range from days to years.

The premium is simply the cost of buying the option. You pay this amount upfront to the seller. Whether you make or lose money on the trade depends on how the stock price moves relative to the strike price, but the premium is what you pay for the opportunity.

Now that you know the building blocks, let's review.