Options Trade

The right to either buy or sell a security, commodity or financial instrument at a specified price, but no obligation to buy or sell during a specified time period. The seller of the option is referred to as the writer, who takes on the obligation to fulfill the contract if executed by the purchaser.

Types of Options:

Call: An option to purchase or enter into a long position. For example an IBM 110 call would give the owner the right to purchase IBM from the option writer at 110.

Put: An option to sell or enter into a short position. For example a Microsoft 50 put would give the owner the right to sell Microsoft to the option writer at 50.

A good way to remember is that you can "call the market up" ie buy a call when you're bullish or "put it down" ie buy a put when bearish.

Options Styles:

European: Options which can only be exercised at expiration.

American: Options which may be exercised any time up to expiration.

Bermudan: Options which can be exercised only on prespecified days during the life of the option

Uses for Options:

The advantage of options is that they can allow a trader to take very specific positions in the market. For example, one could take a position based on the idea that the market will move above X, but not higher than Y. By combining options with positions in the underlying instrument, one can create a wide array of profit/loss profiles.