A stock option is a contract that gives the buyer the right to buy or sell stock at a particular price on or before a certain expiration date, however there is no obligation to do so. If you let the expiration date pass, the option becomes worthless, but you're only out the premium paid. Here is a look at the different types of stock options and how they work.
   
Call Option

A call option gives the buyer the option to purchase an agreed quantity of a particular stock from the seller on or before an expiration date at a certain price, known as the strike price. The seller has to sell the stock if the buyer wants it by the expiration date. The buyer pays a fee (called a premium) for this right.

The buyer benefits when the stock is moving up, bringing its value above the strike price. The option is then said to be 'In the Money.' On or before the expiration date, the buyer acquires the stock at the strike price and makes a profit by selling it. If the stock ends up lower than the strike price, the buyer is not under the obligation to buy. The risk for the buyer is limited to the premium. 

Call options are profitable when the market is booming.
 
Put Option

A put option is a contract that allows you to sell stock at a particular price (strike price) on or before an expiration date. The seller pays a premium to buy a put option. 

If the value of the stock falls and is lower than the strike price, you can buy the stock at the market price and make a profit because you can sell at the higher strike price. If the value of the stock rises, you are not under the obligation to sell the stock at the expiration date, and what you lose is the premium you have paid.

Put options are profitable for the seller when the market is in decline.

If you are selling a put option to somebody who holds stock, you are known as a "writer." The writer is someone who is bullish on the market and collects a premium. If the stock's value increases, the writer gains as the seller of the stock will not be inclined to sell it at the strike price, when the market value is higher. The premium is the writer's maximum gain, and having the option expire is the best case scenario.

LEAPS

LEAPS or Long-Term Equity Anticipation Securities are options that expire much further in the future and typically have more than one year left before the expiration date.

The premiums for LEAPS are higher than for standard put or call options for the same stock. That's because the long duration before the expiration date gives the stock more time to make a substantial move and for the investor to make a healthy profit.

LEAPS allow the holder to keep track of the long-term price movement without the need to invest the larger amount of capital that would be required to own the stock outright. LEAPS can be exercised at any time before expiration.

Employee Stock Options

An employee stock option is a call option on a company's stock, issued to employees as a  form of non-cash compensation. You get the right to buy a certain number of shares of your employer's stock at a specified price over a certain period of time. The company is under the obligation to sell the agreed stock to the employee at the strike price by the expiration date. This is an incentive to employees to work toward boosting the company's stock price above the strike price.

Typically restrictions are imposed such as vesting and limited transferability. Vesting rules specify how long employees should be part of the company before the benefits become irrevocable.

Employee stock options should not be confused with employee stock ownership plans or ESOPs.