Options Strategies

Options are contracts to buy or sell a stock at a certain price on or before an expiry date. There are two basic types of options: call options and put options.

Option Buyers
Call option gives you the right (but not the obligation) to buy the underlying stock at a predetermined price. You would purchase a call option (aka long a call) if you anticipate the price of the underlying stock going up before the expiry date. The price you pay to the seller for the “right to buy” is called a premium, while the price at which the security can be bought is called the strike price.

Put option gives you the right (but not the obligation) to sell the stock at a certain price on or before a certain date. You would purchase a put option (aka long a put) if you believe that the price of the underlying security is going down before the option reached expiration. The price you pay to the seller of a put option for the “right to sell” is called a premium, while the price at which the security can be sold is called the strike price. The difference between the stock’s current market price and the strike price is the amount of profit that can be gained.

Options Sellers (or Option Writers)
While buyers are said to have a long position, sellers are said to be in a short position. Sellers of both call and put options are obligated to buy or sell the underlying security if buyers choose to exercise their rights. The following chart illustrates the risk and reward involved with writing or selling call or put options.