The SEC's definition describes only the purchaser, and what it leaves out is the single most important fact about the instrument. "The right but not the obligation" is accurate and it is half of a contract. The other party has sold that right and holds the matching obligation, and there is no version in which both sides have an option. So an options contract is not a thing with one risk profile. It is a thing with two, and which one applies depends entirely on whether you bought or sold it.
What that means concretely on each side. A buyer pays the premium and can lose all of it and nothing more, because the worst case is that the right expires unused. A seller receives the premium, which is the most they can make, and takes on the obligation. If the obligation is to deliver a security the seller does not already own, the exposure behaves like a short position and has no arithmetic ceiling, because the price of the underlying can keep rising. If the obligation is to buy a security at the strike, the exposure is bounded, because the underlying cannot fall below zero, but the bound is the full strike value less the premium received rather than anything smaller. Capped loss on one side and uncapped or large loss on the other, from the same piece of paper.
Expiration makes timing part of the claim rather than a detail of it. Most investment positions have no deadline, so an investor who is early is merely early. An options contract stops existing on a date, and a view that turns out to be correct a month after expiry produces the same result as a view that was wrong. This is why time is priced. A contract with more time remaining is worth more than an otherwise identical one with less, and that component erodes as expiry approaches whether or not the underlying moves.
The price of an option decomposes into what it is worth now and what it might become. The first part is whatever the right is worth if exercised immediately, which is zero for many contracts. The second part reflects the time remaining and how much the underlying is expected to move, and it is the reason two contracts on different companies at the same strike distance can cost very different amounts. Running that relationship backwards is how implied volatility is obtained: it is inferred from option prices rather than measured from past ones, and our page on volatility covers what that reading does and does not tell you.
Contract size is where beginners lose money on arithmetic rather than on judgment. An options contract is written on a standardized quantity of the underlying, and the premium is quoted against a single unit of it. The cost of one contract is therefore the quoted premium multiplied by that quantity, not the quoted premium. For traditional listed equity options that multiplier is 100, a figure set by the listing exchanges' rules rather than by federal statute, which is why it is not universal: exchanges designate different multipliers for some products, and contracts are adjusted after corporate events such as stock splits. The instruction that survives all of it is to check the contract's own terms before assuming what a quoted price means.
Two contract types, named and left to their own pages. A call gives the right to buy and a put gives the right to sell, and each carries its own mechanics and its own uses. The mechanics of exercise, assignment and expiration likewise belong with their own terms. This page deliberately covers no strategies, because a strategy is a combination of positions and the combinations only make sense once the two sides above are clear.
One practical point of contact with the trading rules. The definition of a day trade used in the margin rules "encompasses any security, including options," so buying and selling the same options contract on the same day counts for that purpose exactly as a stock trade would.
