The hardest part of learning about options trading strategies is getting used to the language. Once you nail that, you're most of the way there.
Here are the terms you are going to need to learn to understand and use options. Keep in mind that the best way to master jargon is by applying it in real situations.
Let's jump right in by first explaining puts and calls.
These are two of the key fixed ingredients of an option – fixed, meaning they never change. They tell us what the option stands for and what it is worth.
A call is a contract that gives its owner the right to buy 100 shares of stock at a fixed price (known in advance). A put is just the opposite, and completes the transaction. It's a contract giving its owner the right to sell 100 shares of stock.
These concepts are the keys to exactly what an option is.
An option is a contract granting you as buyer control over 100 shares of stock. This is always the case - one option per 100 shares.
So when you buy a call, one major benefit is that you control 100 shares. This means that:
a) You can exercise the call and buy 100 shares at a fixed price per share (though you would only do this when the current market price was higher than the fixed strike; it makes no sense to pay full price when you don't have to); or
b) You can sell the call and take a profit (the profit comes into the picture when the stock rises, making the option more valuable, too).
A put is an option that gains in value when the stock price falls. You still have control over 100 shares, but in a different way. When you own a put:
a) You can exercise the put and sell 100 shares at a fixed price per share.
b) You can sell the put and take a profit (the profit is there if the stock price falls, making the option more valuable).
Every option controls 100 shares of a specific stock, index, or fund. This is called the underlying security. It cannot be changed during the lifetime of the option, and options are not transferrable.
By the way, we in the biz often just call this asset the "underlying," so be ready to hear that.
Every option has an expiration date. That is the third Saturday of the expiration month, but the day before (the third Friday) is the last trading day, since the markets are closed on Saturdays. After expiration date, the option no longer exists.
Finally, there is the strike price, which is the fixed price per share of the underlying. If an option's owner decides to "exercise" (meaning he decides to buy 100 shares through a call, or to sell 100 shares through a put), the strike is the fixed price.
These four standardized terms define each and every option and, collectively, set them apart from one another.
Again, none of the terms can be changed or transferred. If you have an open options position and you want to make a change, you need to close it and replace it with a different option.
All four defining terms are expressed in every option listing.
Take a look at this figure showing the collective terms for a call and a put on Google Inc. (NasdaqGS: GOOG).
Note that all of the terms are highlighted: Type (call or put), underlying security (Google), expiration date (March 2012), and strike (610). The listing also summarizes the current value for each option. Here, the call's value was 18.39 (or, $1,839), and the put was valued at 14.10 ($1,410).