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Options Basics

Purchasing an option gives the buyer the right, but not the obligation, to buy or sell a specific amount of an underlying security at a specific price within a specified time period. For example, if an open futures position is not offset before expiration, both the buyer and the seller are required to perform under the terms of the contract.

Some options basics:

• Buying an option gives you the right to buy or sell an underlying security.
  
• As an option seller (writer), you have obligations to the options buyer.
  
• There are two types of options:
  • Calls (call options) - give you the right to buy an underlying security.
  • Puts (put options) - give you the right to sell an underlying security.
    
• Each option corresponds to 100 shares of an underlying security.
  
• Strike Price. If an option is to be exercised, this is the price at which an underlying security can be purchased or sold.
  
• Expiration Date. The date on which an option expired. It is the 3rd Friday of the expiration month. Each option has an expiration day. You have lost the right to buy or sell the underlying security at the strike price, after the expiry.
  
• Premium. The price of an option. If an option costs $3 per contract, your total premium is $300 (one contract = 100 shares), plus commission (transaction) costs.

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