Options 101

Time to freshen up my option trading skills. I remember being very very confused by what is a "call" and what is a "put." Then the whole "buy" and "sell" part. This little diagram was very helpful. Thought I should share it with you.

Here on vertical axis you have 2 types of options Calls and Puts. On horizontal axis you have buy and sell. This leads to 4 choices A,B,C and D. Lets explore them in more detail in context of stocks. Area of my interest. Pay special attention to words in red color.

• A = Buy Call - Gives you the right to buy the shares (of the company for which you bought this option) at the fixed price (that you choose when you buy this option) until a fixed date (that you choose as well). There are variations like "American" and "European" options. They actually have nothing to do with America or Europe. For all practical purposes you can exercise your options up to the date you selected.

• C = Buy Put - Gives you the right to sell the shares at the fixed price until a fixed date. very similar to case A above. One key difference - make sure you get that right.

• B = Sell Call - You now have obligation to sell shares at the fixed price until a fixed date. Watch for the word obligation. This one you are forced to sell your shares (You better have them). That means if price goes up you loose out.

• D = Sell Put - You are obliged to buy the shares at the fixed price until a fixed date. You better have cash to fork out. Remember if price drops you are still buying them at the price you agreed to.

These strategies are simple but have all sorts of risk associated with them. I lost money on many of my trades in the beginning. Hopefully, this gives you some idea. Please read up before trading these. Web has lots of information. Chicago Board is a good starting point.