An option is a contract between a buyer and seller, giving the buyer the right, but not the obligation to buy (call option) or sell (put option) the underlying security (stock, currency, comodity, etc...) to the option seller for a predetermined price (the strike price), within a specified period of time (expiration).
Within this contract, the option seller has the obligation to perform. As a result, the option seller charges the option buyer a "Premium" for the right to buy or sell the underlying security at the predetermined price until expiration.
For the purposes of this discussion, we will be talking about equity options.
With Equity Options, each contract controls 100 shares of the underlying stock. So if the contract is exercised, the contract stipulates the performance for 100 shares of the underlying Stock. Likewise, the quoted price represents the price per hundred. Example
20 call contracts on GM would control 2000 shares (20 X 100 shares) of GM Stock.
There are 2 types of options:A CALL OPTION
A CALL Option is a contract that gives the buyer the right, but not the obligation, to purchase a set amount of stock (usually 100 shares) at a predetermined price anytime before the contract expires (American Style option) or at expiration only (European Style Option). As mentioned before, the predetermined price is known as the strike price. If this contract is exercised prior to expiration, the option seller has the obligation to sell the underlying stock to the option buyer.
A PUT OPTION
A PUT OPTION is a contract that gives the holder the right, but not the obligation, to sell a set amount of stock (usually 100 shares) at a predetermined price anytime before the contract expires (American Style option) or at expiration only (European Style Option). As mentioned before, the predetermined price is known as the strike price. If this contract is exercised prior to expiration, the option seller has the obligation to buy the underlying stock from the option buyer. Options Trading:Once these contracts have been created, they are usually traded on the major exchange like the CBOE (Chicago Board Options Exchange) and AMEX (American Stock Exchange) etc... They are listed in the form of "Chains" connected to the underlying stock. 
All listed options have a specific expiration date. For Equity options, this date is the third Saturday of the expiry month. This is often confused with the fact that the last "trading" day is the third Friday of the expiry month. Just like stocks, options gain and lose value. Their value is divided into 2 parts:Intrinsic value
Call options: The value of the stock's price minus the strike price.
Put options: The value of the strike price minus the stock' price.
Time value
The time before option expiration. "Time decay" is the loss of value in an option due to the passage of time. This is our most important weapon when we trade.
Example:
If GM is trading at $17.58, a GM 15 Call trading at $2.70 would have an intrinsic value of $2.58 and time value of $0.12.
If GM is trading at $17.58, a GM 15 Put trading at $0.14 would have an intrinsic value of $0.00 and time value of $0.14. "In the money" and "out of the money"Call options are considered "In The Money" when the stock's price is higher than the strike price. And they are considered "out of the money" when the stock's price is lower than the strike price. OptionXspress makes it easy to see which calls are "in the money" and which ones are "out of the money".
I the example below, when GM is at $17.58 the "in the money" calls are colored yellow and the "out of the money" calls are colored white:
Put options are considered "In The Money" when the stock's price is lower than the strike price. And they are considered "out of the money" when the stock's price is higher than the strike price. Likewise, with optionXpress, it is easy to see which puts are "in the money" and which puts are "out of the money".
The "in the money puts are colored yellow, and the "out of the money" puts are colored white:
When an investor buys a Call/Put he is considered to be "Long" that contract.
When an investor sells a Call/Put he is considered to be "Short" that contract.
Our trading method focuses on "shorting" equity options and taking advantage of "time decay".
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