How to Buy and Sell Options

Option is a contract between a buyer and seller. People buy or sell options for many different purpose, such as to protect your stocks or futures investment (think like buying an insurance), to generate income or just for pure speculation.

Instructions

1. There are 2 different options, call option and put option. Buy call option gives you the right to buy underlying stock at the strike price, and buy put option gives you the right to sell underlying stock at the strike price. You pay premium to the option seller when you buy options, and of course commission to your broker.

2. Strike price is the price that the buyer and seller agree to buy or sell at expiration date. In the money option is option with intrinsic value or the strike price less than the market price for call option, and more than market price for put option.

3. On the money option is option that has strike price same as the market price. Some people also refer as near the money options if the strike price very close to the market price. Out of the money option is the option that has strike price more than market price for call option and less than market price for put option.

4. You can also sell (short) or write option without owning the option itself. Sell call option gives you the obligation to sell underlying stock at the strike price to the call buyer, and sell put option gives you the obligation to buy underlying stock at the strike price. You receive premium from buyer when you sell option.

5. 1 contract of option consist the right (for buyer) or obligation (for seller) for 100 shares of underlying stock. You can close your long (option buyer) or short (option seller) before the expiration date of the option. Option buyer can exercise their right to buy (for call buyer) or to sell (for put buyer) anytime before expiration date (American style option).

6. You can buy or sell option through your trading broker. Most people trading option online, thus you have direct access to the brokerage trading platform and place your trade from your own computer at home. Most online brokerage firm also have a real time reporting of your account or your option position. To learn more about option trading go to online brokerage firm and click on educational link. You can open virtual trading account as well to trade without using your own money.