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There is no free lunch with stocks and bonds. Options are no different. Options trading involves certain risks that the investor must be aware of before making a trade.

Options are derivatives of financial securities – their value depends on the price of some other asset. That is essentially what the term, derivative, means. There are many different types of securities that fall under the label of derivative, including calls, puts, futures, forwards, swaps (of which there are many types), and credit derivatives which we will cover in a future video.

Options represent the right (but not the obligation) to take some sort of action (buy or sell an underlying security) by a predetermined date (the expiration date).

There are two types of options, calls and puts. And there are two sides to every option transaction -- the party buying the option, and the party selling (also called writing) the option. Each side comes with its own risk/reward profile and may be entered into for different strategic reasons. The buyer of the option is said to have a long position, while the seller of the option (the writer) is said to have a short position.

Note that tradable options are contracts between two parties. The companies whose securities underlie the option contracts are themselves neither involved in the transactions nor the cash flows between the various parties in the market. In any option trade, the counterparty may be another investor, or perhaps a market maker (a type of middle man offering to both buy and sell a particular security in the hopes of making a profit on the differing bid/ask prices). All parties it should be noted do not directly face each other, instead they face the options clearinghouse, and I have a separate video on that topic.

What's a call option?
A call option, is the option to buy the underlying stock at a pre-agreed price (the strike price) by a pre-agreed date (the expiration date). The buyer of a call has the right to buy shares at the strike price until expiration. The seller of the call (also known as the call "writer") is the one with the corresponding obligation. If the call buyer decides to buy (known as exercising the option) the call writer is obliged to sell their shares to the call buyer at the strike price.

If an investor bought a call option on Apple Computer stock with a strike price at $100 expiring in two months. That call buyer has the right to exercise that option, paying $100 per share, and receiving the shares. The writer of the call would have the obligation to deliver those shares and be happy receiving $100 for them.

What's a put option?
If a call is the right to buy, then perhaps unsurprisingly, a put is the option to sell the underlying stock at a predetermined strike price until a fixed expiry date. The put buyer has the right to sell shares at the strike price, and if he/she decides to sell, the put writer is obliged to buy at that price.

Why use options?
A call buyer seeks to make a profit when the price of the underlying shares rises. The call price will rise as the shares do. The call writer is making the opposite bet, hoping for the stock price to decline or, at the very least, rise less than the amount received for selling the call in the first place.

The put buyer profits when the underlying stock price falls. A put increases in value as the underlying stock decreases in value. Conversely, put writers are hoping for the option to expire with the stock price above the strike price, or at least for the stock to decline an amount less than what they have been paid to sell the put.

We'll note here that relatively few options actually expire and see shares change hands. Options are, after all, tradable securities. As circumstances change, investors can lock in their profits (or losses) by buying (or selling) an opposite option contract to their original action.

Calls and puts, alone, or combined with each other, or even with positions in the underlying stock, can provide various levels of leverage or protection to a portfolio.

Why Trade Options?
-Option users can profit in bull, bear, or flat markets.
-Options can act as insurance to protect gains in a stock that looks shaky.
-They can be used to generate steady income from an underlying portfolio of blue-chip stocks.
-Or they can be employed in an attempt to double or triple your money almost overnight.

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