"Options" are the common name for an options contract, which are a purchased agreement (a contract, acutally) for the ability (the, "option") to buy a set number of shares at a pre-determined price. An options contract represents 100 shares of underlying stock.
There are a couple of types of options, including:
Why do people buy options? Leverage. Consider the following example:
Our mythical stock, Everything2 Incorporated (ETWO), is currently trading at $75 per share. There are some call options available for purchase at 1/2, with a strike price of $80 per share. We, being the risky type of people we are, purchase 10 of the said options contracts and pay out $500 (1/2 * 100 * 10 = $500). We now own the option to buy 1000 shares of ETWO if the strike price of $80 is made before the expiration date of the contract.
And because I am writing this example, everything turns out okay and ETWO goes all the way up to $82 per share before the contract expires! Hooray!! We now can sell the shares in the contract at a profit of $2 per share ($82-$80)-- minus the original cost of the contract of $500-- for a net profit of $1500. Not bad! As in this example, when the stock price is above the strike price, the options are said to be in-the-money.
The leverage part is that we had control over 1000 shares of stock for only $500. We made a 300% profit without having to have the $75,000 ($75/share * 1000 shares) to control the stock outright. That's leverage.
The danger is that the options contract will expire worthless. If the price of the stock fails to meet the strike price of the contract before the expiration date. You are out the price of the contract. However, you can always attempt to cut your losses by selling the contract to some other fool before this happens.
Aside of the prerequisite of having a lead-lined stomach to trade options, you also need to know the following about a stock before you options trade:
Beware of options e2 trader, many a time has an expired options contract been the last thoughts of trader as s/he lept from the 25th floor...