Trading stock options can be a very effective method of investing because options offer a way to leverage your investments, while also providing an opportunity to limit the risk of owning stock.
The definitions below will provide a important foundation on which the rest of our discussions will be based.
Stock Option - A stock option gives the buyer the right, but not the obligation to buy/sell a share of the underlying stock at a set price on or before a given date.
Strike Price - The stock price at which the option gives its owner the right to buy/sell the stock.
Expiration Date - The date on which an option expires. Options expire on the 3rd Friday of every month, so an option that expires in January '05 will expire the third Friday of that month.
Buying an Option - Also referred to as "going long."
Selling an Option - Also referred to as "going short" or "writing" an option.