Options are financial instruments that convey the right, but not the obligation, to engage in a future transaction on some underlying security, or in a futures contract.

In other words, the holder does not have to exercise this right, unlike a forward or future. For example, buying a call option provides the right to buy a specified quantity of a security at a set strike price at some time on or before expiration, while buying a put option provides the right to sell. Upon the option holder’s choice to exercise the option, the party who sold, or wrote, the option must fulfill the terms of the contract.

The theoretical value of an option can be determined by a variety of techniques. These models, which are developed by quantitative analysts, can also predict how the value of the option will change in the face of changing conditions.
Exchange-traded options form an important class of options which have standardized contract features and trade on public exchanges, facilitating trading among independent parties. Over the counter (OTC) options are traded between private parties, often well-capitalized institutions, that have negotiated separate trading and clearing arrangements with each other.

The primary types of financial options are:

• Exchange traded options (also called "listed options"). Exchange traded options have standardized contracts, and are settled through a clearing house with fulfillment guaranteed by the credit of the exchange. Since the contracts are standardized, accurate pricing models are often available. Exchange traded options include:
• Stock options,
• Commodity options,
• Bond options and other interest rate options,
• Index (equity) options, and
• Options on futures contracts
• Over the counter options (OTC options, also called "dealer options") are traded between two private parties, and are not listed on an exchange. The terms of an OTC option are unrestricted and may be individually tailored to meet any business need. Option types commonly traded over the counter include:
• Interest rate options,
• Currency cross rate options, and
• Options on swaps or swaptions.
• Employee Stock Options are issued by a company to its employees as compensation.