Options-R-EZ

An option is a binding contract between a Buyer and Seller for an underlying security (such as a stock or bond) with strictly defined terms (price, expiration date).  An option contract gives the Buyer the right, but not the obligation, to buy or sell an underlying security at a specific price on or before a certain date. Conversly, an option Seller is obligated to fulfill their end of the bargain by selling an underlying  security at a specific price on or before a certain date, only if it is excercised.  In other words, an options contract gives the Buyer rights and commits the Seller to an obligation. 

There are two types of options that create the foundation for all advanced option strategies; Call & Put. 

Call Option
A call is an option contract that gives the owner the right to buy the underlying stock at a specified price (strike price) for a certain, fixed period of time (until its expiration).

Example:
XYZ Corp. - July 60 Call

The Buyer of a call option is entitled to purchase 100 shares of XYZ Corp. common stock at $60 per share at any time prior to the option's expiration date in July.  (The Buyer is betting that XYZ stock price will increase above the $60 strike price before the July expiration.)

The Seller (or writer), of a call option is obligated to sell 100 shares of XYZ Corp. common stock at $60 per share, if or when the option contract is excercised by the Buyer. (The Seller (or writer) is betting that XYZ stock price will remain below the $60 strike price before the July expiration.)

Put Option
A put is an option contract that gives the owner the right to sell the underlying stock at a specified price (strike price) for a certain, fixed period of time (until its expiration). 

Example:
XYZ Corp. - July 60 Put 

The Buyer of a put option is entitled to sell 100 shares of XYZ Corp. common stock at $60 per share at any time prior to the option's expiration date in July. (The Buyer is betting that XYZ stock price will remain below the $60 strike price before the July expiration.)

The Seller (or writer), of a put option is obligated to buy the underlying stock from the option owner if or when the option contract is excercised by the Buyer. (The Seller (or writer) is betting that XYZ stock price will increase above the $60 strike price before the July expiration.)