An Introduction to Options

A contract to buy or sell a specific financial product is an option. The specific financial product is officially known as the option's underlying instrument or underlying interest. With regards equity options, the underlying instrument is an exchange traded-fund or ETF, a stock, or a similar product. The contract contains very precise provisions on the specific price or the strike price, at which the contract may be executed, or acted upon. An expiration date is defined for an option and once it expires, it no longer exists as well as any value.

Two types of options exist, a put option and a call option. A put option is necessary to give you the right to buy the underlying security or commodity within a price specified. A call option on the other hand is necessary to give you the right to sell the underlying security or commodity within a price specified. The expirations dates apply to both puts and calls. Once these expiration dates are reached, the contract has no value anymore. Once this happens, you make a choice to either buy or sell and whether to choose a call or a put – depending on your plan of which to achieve, being an options investor.

An option is characterized as "derivative security" since they derive part of their value from underlying security. Trading of stock options are made in "units" that usually represent one hundred (100) shares of the underlying security, meaning one (1) option will give you the right (but not the obligation) to purchase or sell one hundred (100) shares of that security, given the contract has not yet expired.