How To Make Money With Stock Options

C. Understanding The Terminology: 12 Key Terms

The following discussion is very basic and certainly not thorough. More complete discussions of option writing are available in many publications, including the pamphlet distributed by the Chicago Board of Options Exchange to everyone who opens an options account with a member firm. Brokers also have access to discussions in their company’s procedure manuals. But the following brief summary is all one needs to understand options. It is presented in accordance with my personal views of what the important concepts of option writing are, and how they should be conceptualized. Reading definitions is no fun, ut a basic understanding of the vocabulary is essential to further understanding of the concepts.

I classify options into four categories: STOCK CALLS, STOCK PUTS, INDEX CALLS, and INDEX PUTS. Some texts on options that I’ve seen properly define PUTS and CALLS and then assume that a Put and a Call on an index fits the same definition as a stock Put or a stock Call. Because I think that the risks and strategies involved in Puts and Calls on stocks are very different than those on indices, I recommend thinking about these four kinds of options as if they were four different pieces of paper, like stock certificates, each representing a different kind of investment.

When talking about an option, the option should be designated by the underlying security, its termination month, its strike price, and its type. For example - one Ford Jan 35 CALL is an option to buy 100 shares of Ford Motor Co. At $35 per share until the end of the third trading Friday next January. (See Figure I-2.) With that basic information in mind, here is a brief definition of the dozen basic option terms for repeated reference:

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