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A stock option is a type of a financial derivative representing a contract between two parties. The buyer has the right but not the obligation to buy or sell a security or other asset at an acknowledged price during a certain period.

Certain terms associated with options are:

About Stock Options 1) Option class: call and put

2) Strike price: price at which the underlying asset is bought or sold when the option is exercised.

3) Expiration date: date till which the option is valid

4) Option style: American or European

5) Underlying Asset: the security for the option

6) Contract multiplier: quantity of the underlying asset that needs to be delivered.

Option market players:

1) Buyers of calls

2) Sellers of calls

3) Buyers of puts

4) Sellers of puts

Call: A call is the right to buy a specified quantity of an asset at a certain specified price within a period of time. People who buy options are called holders and those who sell options are called writers; furthermore, buyers are said to have long positions, and sellers are said to have short positions. A call gives the holder the right to buy an asset at a certain price within a specific period of time.
Buying call option: Call buyers are not obligated to buy or sell. They have the choice to exercise their rights if they choose. This strategy of trading call options is known as the long call strategy.

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Seller of call option: provides the seller an obligation to sell the security at the strike price if the option is exercised. The writer is paid a premium for the risk he has taken with the obligation. They hope that the option expire worthless so that they may profit from the premium. Selling calls is very risky but very rewarding as well.

· Covered calls: if the call option writer owns the obligated quantity of the underlying security

· Naked calls: When the option trader write calls without owning the obligated holding of the underlying security

Put: a put option gives you the right but not the obligation to sell the company’s stocks at a specific price from the date of purchase until the expiration date. The buyer of the put option would want the price of the stock to decrease as put gives the option to sell at a certain price. People buy puts and hope to profit by selling the puts at a higher price, or by exercising their option.

Buying put options: the put option buyer buys put options in the hope that the price of the underlying asset would significantly decrease before the option expires. Put buyers are not obligated to buy or sell. They have the choice to exercise their rights if they choose.

Selling put options: Put option writers, also known as sellers, sell put options with the hope that they expire worthless so that they can pocket the premiums. Selling puts, or put writing, involves more risk but can be profitable if done properly.

· Covered puts: if the put option writer is also short the obligated quantity of the underlying security.

· Naked puts: if the put option writer did not short the obligated quantity of the underlying security when the put option is sold.

Options that have more than six months until expiration are called Leaps.

Purchase or sale of options with different strike prices or dates but with same security and class is called a spread.

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