Options basics
Options are know as "Derivatives" because the option contract derives it's price and value from the underlying asset from which it is based.
The value of the OPTION fluctuates as the price of the underlying ASSET rises or fall in price
An OPTION is the right, but not the obligation to buy or sell a stock or index for a specific price ON or BEFORE a specific date
A CALL OPTION is the right to BUY stock/index, The investor who purchases an option, wether it is a put or call, is the option "buyer"
A PUT OPTION is the right to SELL stock/index. The investor who sells the put or call "to open" is the "seller" or "writer"
OPTIONS are contracts in which the terms of the contract are standarddized and give the buyer the right, but not the obligation, to buy or sell a particular stock/index at a fixed price "the strike price" for a specific period of time "until expiration"
The OPTIONS market provide a mechanism where many different types of investors can achieve their specific investment goals. An OPTION INVESTOR may be looking for long term or short terms profits.
PARAMOUNT: you need a thourough understanding of the markets you will be trading.
OPTIONS characteristics
OPTIONS give you the right but not the obligation to buy or sell an underlying security or index
If you buy an OPTION, you are not obligated to buy the underlying security. You simply have the right to exercise the option.
OPTIONS are in force for specific period of time after which they expire and you lose to buy or sell the underlying security
When OPTIONS are purchased, the buyer incur a DEBIT
OPTIONS are available in different strike prices representing the price of the underlying security
The cost of an OPTION is referred to as the OPTION PREMIUM
There are two types of OPTIONS
CALLS: Give you the right to BUY the underlying security
PUTS: Give you the right to SELL the underlying security
Most options are never exercised and are closed out before option expiration
How OPTIONS work: http://www.investopedia.com/university/options/option2.asp