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Options 101 An option is a contract giving the buyer the right, but not the obligation, to buy or sell an underlying asset (a stock or index) at a specific price on or before a certain date (listed options are all for 100 shares of the particular underlying asset). An option is a security, just like a stock or bond, and constitutes a binding contract with strictly defined terms and properties. Listed options have been available since 1973, when the Chicago Board Options Exchange, still the busiest options exchange in the world, first opened.
There are only two kinds of options: Call Options and Put Options. A Call Option is an option to buy a stock at a specific price on or before a certain date. Call options increase in value when the underlying stock goes up, and decrease in value when the underlying stock goes down. Put Options are options to sell a stock at a specific price on or before a certain date. Put options increase in value when the underlying stock goes down, and decrease in value when the underlying stock goes up. When you buy an option, the price you pay for it, called the option premium, secures your right to buy or sell that certain stock at a specified price, called the strike price. If you decide not to use the option to buy the stock, and you are not obligated to, your only cost is the option premium. Also, if you wish, you may sell the option at any time. A system of market makers is set up to assure you almost always have a buyer for options you don't want. Since options have expiration dates, part of their value is tied to how long an option has until it expires. This is called time value and decrease as the expiration date nears. Basic options trading involves buying and selling put and call options.
Advanced Strategies Spread Trades are various combinations of options, which are bought and sold to accomplish certain goals. Below are links to explanations of the strategies we use at OptionPro.com. Bull Put (Credit) Spreads Explained Bear Call (Credit) Spreads Explained Bull Call (Debit) Spreads Explained Bear Put (Debit) Spreads Explained
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