Basic Types of Options:

July, 2012:

There are varied terms and concepts that relate to option trading activity. Here are a few. However, please keep in mind that the purpose of this post is to provide the reader with general information concerning this information. Remember that the information provided herein is not designed to be complete in all material respects and does not identify all option related terms that apply to option trading activity. Consequently, if you have any questions concerning its content, you should contact a qualified professional.

In general an option is a contractual right to buy or sell something that is granted in exchange for an agreed upon sum.  Each call option contract controls 100 shares of the common stock of the underlying company.   If the right is not exercised after a specified time period, the call option expires and the option buyer forfeits what he or she has paid for the option.  Call option buyers speculate that the price of the underlying stock will increase.  Conversely, a put option gives its buyer the right to sell a specified number of shares of stock at a particular price, also withing a specified time period.  Put buyers expect the price of the underlying stock to fall.

An options writer is a person or financial institution that sells put and call options.  A writer of a put option contracts to buy 100 shares of stock from the put option buyer by a certain date for a fixed price.  A writer of a call option guarantees to sell the call option buyer the underlying stock at a particular price before a certain date.

The quoted option price is the market price at which an option contract is trading at any particular time.  The option price is determined by many factors, such as its intrinsic value, time to expiration volatility of the underlying stock, interest rates, dividends, and marketplace adjustments for supply and demand.

Option trading is not for everyone.  As set forth in other posts on this blog, option trading can be highly speculative and can rapidly result in substantial losses, in a relatively short period of time, sometimes in excess of your equity.