When used with financial instruments, options are a contract between two parties in which one party has the right, but not the obligation, to do something. Usually, the option involves buying or selling an underlying asset. Having rights without obligations has financial value, so option holders must purchase these rights at a price, called a premium. Options derive their value from the underlying asset, which is why they are called derivative instruments. An easy-to-understand primer on the lingo and valuation technique can be found here.
A Primer on Valuing Options
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