Options are are one of the most dynamic trading instruments ever created, dating back to the 17th century. Because trading options involves less capital than trading stocks, the options market provides a high leverage method to trading and investing which can significantly reduce the overall risk of trading and also generating additional income.  In a nutshell, option buyers have rights and option sellers have obligations. Option buyers have the right, but not the obligation, to buy (call) or sell (put) the underlying stock at a specified price until the 3rd Friday of their expiration month. The options market consists of type types of options: calls and puts. Call options give you the right to buy the underlying asset. Put options give you the right to sell the underlying asset. In order to understand how to trade options, it is important that you become familiar with how both of these types of options work. All of the strategies you learn about will relate to these.

The great thing about options is if you want to purchase an option, your risk is limited to the price of the option (the premium). In contrast, the seller of the option receives a credit in their account for selling a call/put option. The option seller keeps this amount if the option expires worthless. However, option sellers take on an obligation to buy (put) or sell (call) the underlying instrument (stock, index, ETF etc) if their option is exercised by an assigned option holder. Therefore, selling an option is normally not something for option beginners and also requires a healthy margin in your trading account.

To trade options, you need to understand and be comfortable with the terminology of the option market. The price at which an underlying stock can be purchased or sold if the option is exercised is called the strike price (or exercise price). Options have several strike prices above and below the current price of the underlying instrumen. Normally stocks that are priced below $25 USD  have strike prices at 2 dollar intervals, and anything priced above that level usually have strike prices at $5 dollar intervals.

Options are expiring assets, unlike stocks. They will cease to exist after a certain date - the expiry date.  A stock option expires by close of business on the third Friday of the expiry month. All listed options (those that trade on an exchange) have options available for the current month and the next month as well as specific future months (sometimes known as the "back-months"). Each stock has a corresponding cycle of months available for options. There are three fixed expiration cycles available. Each cycle has a four-month interval:

• January, April, July and October
• February, May, August and November
• March, June, September and December

When you buy an option, you are paying the option premium. The option premium is determined by a number of factors including the type of option (call or put), the current price of the underlying instrument, the option strike price, time to expiry, and volatility.

An option premium is priced on a per share basis. In the US, each option on a stock generally corresponds to 100 shares. In other countries like the UK for example, each option generally refers to 1000 shares of the underlying. Therefore, if the premium of a US option is priced at 4, the total premium for that option would be $400 (4 x 100 = $400). When you buy an option, you create a debit in the amount of the premium to the buyer's trading account. When you sell an option you create a credit in the amount of the premium to the seller's trading account: