Options contracts give you the right (but you are not forced) to buy or sell a certain number of shares of a stock at an agreed upon price before the contract's expiration. If you buy an options contract, you can always let it expire, but you will lose your entire investment. 

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Here are some of the basics of what the contracts do and how they work:

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--Contracts are groups of 100 shares. If I buy 3 contracts, it means that I plan to be trading 300 shares.

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--Exercising a contract means that you are using the right that is given to you by the contract. 

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--The strike price is the price that the options would be exercised at.

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--The premium is how much the writer charges for the contract. A $2.00 premium would mean that the person buying the option would be paying $200 for 1 contract. ​

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--You choose when your option expires, but the more time your option has, the higher the premium is. This is called "time value."

 

There are 2 types of options. There are calls which give you the right to buy the shares off of the writer (the person who sold you the contract.) And there are puts. Puts give you the right to sell shares to the writer in the future.

 

You would want to buy calls if you believe that the price of the stock will go up. This is because you can get a discount on the price. You would want to buy puts if you believe that the price of the stock will go down. This is because you can sell the shares for higher than what you can if you sold on market. 

 

There are a few different kinds of trades with options:

Buy to open: This is when you buy a contract(s), and you care now able to exercise the contract at any time before the option's expiration.

Sell to open: This is when you sell a new contract(s) and become the writer, but you may be forced sell or buy a bunch of shares later on if someone exercises your contract.

Buy to close: This is when you buy a contract(s) identical to the one you sold as a writer to cancel out your contract(s). 

Sell to close: This is when you sell a contract(s) that you already own to someone else to close out your position.

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A large part of how the premium is determined is if the option contract is in the money or out of the money. In the money options are usually much safer (they have smaller price swings) but require a larger investment. Out of the money options are riskier (usually have larger price swings) but require a smaller investment. In the money options are when the option holds real value at the current moment. For example, a put option with a strike price of $200 when the actual share price is $190 is considered in the money. For calls, it would be a $190 strike price if the actual share price is at $200. These options have something called "intrinsic value." However, out of the money options don't have any actual value at the moment. An out of the money put option would be something like a $150 strike price on a stock with a current share price of $155. For calls, it would be something like a $150 strike price with a stock that has a current share price of $140. If the price of the stock moves from out of the money to in the money, there will be a big price jump, which is why some people choose do invest in out of the money if they want a chance of making a lot of money but are willing to accept having the option expire worthless (no one would want to buy a contract that has no intrinsic value). An option wouldn't expire worthless if you're careful and leave a lot of extra time cushion on it, but you still may lose a large chunk of your investment. 

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Options are very tricky. You can either make a ton (some people commonly make over 50% per trade) or you can even lose your entire investment.

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