Option Contract
In the bluntest terms, option contracts are limited term up (calls) or down (puts) bets that are 100:1 (for stocks) leveraged that traders and speculators can buy and sell.
Each contract is worth 100 shares of that particular stock, with the option to buy or sell the stock at the strike price. The strike price is the over/under price that determines whether or not the option contract will have value by its expiration date: usually, the third Friday in a designated month.
Example:
Facebook (NASDAQ: FB) is trading at 150 In October. If one thinks FB will reach 160 by mid January, she could buy 100 shares of FB at a cost of $15,000. That might be a bit out of budget for some investors to allocate for a single stock, and a 10-point gain would yield a profit of $1,000 before commissions, or 6%. On the other hand, a single call option contract of FB January 150 might be at 5, or cost $500. If FB did indeed go to 160 before or by mid-January, the call option would be "in-the-money," i.e. over the strike price of 150 for 10. As long as the contract was either sold (realizing a 100% profit before fees) or exercised (purchasing the stock for 150 when the current price is now 160, thereby locking in the profit).
On the plus side, option contracts are very leveraged, but the cash outlay is small enough to manage for a singular speculation without risking a significant part of a portfolio budget, and can multiply one's profit if a number of contracts are obtained and the bet is correct. On the negative side, the risk is high, since the premium value erodes with each calendar day. Stagnancy or a trend against your bet's direction can result, and often does, in loss of the entire trade amount, if not carefully monitored.
Option contracts are considered derivatives, and are also the mechanical basis for all other kinds of derivatives trading, most notably in futures. The futures market includes options, indexes, interest rate securities swaps, commodities, foreign exchange, warrants, and even more obscure markets, such as carbon credits, tax credits related to film and TV production, and others.