Options Introduction: In today's global environment market participants have the ability to invest in almost anything they can dream up. From global ETF's to Volatility products the choices are almost endless. Not only do we have the ability to choose any Currency, Commodity, or World Market we wish to invest in, we also have many ways to place our trades, which in turn can diversify our risk. We may buy stocks, ETF's, Futures, Forex, or even use options. My discipline has always been on using options to reduce risk and create a legitimate edge. As you read my articles I will start with the basics and work up to complex strategies. We will also have trade suggestions included so you may get the real time experience of winning and losing trades. Today let's start with a simple introduction for those who are new to the world of options.

The standard definition of an option most commonly used is "A contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date." As the buyer of an option you are in total control.

2 types of options

We all know that when analyzing a stock we can only have a few assumptions. We can assume that the stock will rise, fall, or go sideways (in later articles we will explain how to profit from sideways movement). Let's begin with an assumption that ABC stock will rise.

Call Options - A call gives the owner the right to buy an asset at a certain price within a specific period of time. This is similar to having a long position on a stock. As a buyer of a call you are hoping that ABC will have a substantial increase before the option expires. You can pay a small amount upfront and if you are correct then you can buy ABC at the agreed upon price (usually at a discount to the current market price). If your assumption is incorrect then you only lose what you paid for the call. This is what is known as "defined risk".

Put Options - A buyer of a put option has the right to sell an asset at a specific price within a specific period of time. Buying a put is similar to shorting stock. You will hope that ABC has a significant drop before the option expires.

Don't worry if this seems a little confusing. Just remember that you buy a call if you think a stock will increase and you buy a put if you think it will decrease.

In our next article we will assume the position of an option buyer and discuss strike selection, and expiration dates.