Like futures, an option gives you the right, but not the obligation, to buy an underlying stock at a specified price at a predetermined date in the future. You earn a profit if the stock’s market value rises above the price by which you acquired your contract upon the agreement’s expiry. If the stock’s market value drops, then you lose your premium.
There are two forms of options: the call option and the put option. If you buy a call option, you are expecting your stock price to go up and you would prefer the put option if you expect the opposite, meaning you expect prices of your stock to decline. You actually earn a profit regardless of whether the price of your stock goes up or down unlike other derivative instruments where you only earn a profit when the price of your stock rises.