An option is a contract between a buyer and a seller that is based on an underlying security, usually a stock. In exchange for the premium, the seller assumes certain obligations.
Each options investing contract has an expiration date, which gives it a limited life span (usually less than nine months). The strike price (or exercise price), is the price at which buyers can exercise their rights under the contract. There are two ways to participate in trading options: call options and put options.
Call options give the holder or buyer the right to buy the underlying security at a specified strike price until the expiration date. The seller of the call has the obligation to sell or deliver the underlying security at the strike price until the expiry date.
Put options grant the holder or buyer the right to sell the underlying security at the strike price until the expiry date. The seller or writer of the put has the obligation to buy or take delivery of the underlying security until expiration, if the option holder exercises the option.
Trading options is a major profit source for many brokers, since you pay commissions each time you buy or sell stock options. That’s one of the main reasons that most options traders wind up losing money.
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