Robert Shiller, teaching Yale's Financial Markets course, explains how options contracts work and why they exist. He opens with core terms and two purposes of options, theoretical and behavioral, then graphs the value of call and put options and works through put-call parity for European options. Using the Binomial Asset Pricing model, he derives a call option's value from the no-arbitrage principle before presenting the Black-Scholes formula as its continuous-time analogue. He compares implied volatility, as captured by the CBOE's VIX index, against actual S&P Composite volatility from 1986 to 2010. The lecture closes with Shiller's account of options on single-family homes, a market he helped launch with the Chicago Mercantile Exchange in 2006. Recorded in spring 2011, the session runs just over an hour and covers the full mechanics of options pricing from first principles to real-world application.