- Time has a direct impact on an option contract, and if its value decreases, the holder may opt to let his contract expire without buying or selling the underlying asset or the option contract.
- The two types of options are calls and puts. A call option gives the buyer the right to buy a certain security and a put giver the buyer the right to sell a certain security. More complex option strategies include spreads, straddles, combos and butterflies.
- Options are traded on major stock, options and commodity exchanges. Options contracts are based on a fixed expiration month and strike price, or the price at which the security can be bought or sold. Long-term option contracts, known as leaps, will have expirations nine months or further away.
- Volatility, a major component of options trading, is part of what accounts for price movement. Volatility helps a trader determine if an option may expire with or without value.
- An call option contract will have intrinsic value if the strike price is lower than the price of the underlying. The inverse is true for a put option. Often option contracts expire worthless or at a loss to the holder.
- American-style options can be exercised early and technically expire on the Saturday following the third Friday of every month. European-style options cannot be exercised early.
