An Option is a contract which gives the buyer the right but not the obligation to:

BUY (in the case of a Call Option) or

SELL (in the case of a Put Option) shares of the underlying security at a specified price (called the strike price) on or before a given date (the expiration day).

Key Points to remember:

1. Call Options increase in value as the stock to goes up.
2. Put Options increase in value as the stock
   to goes down.
3. Option contract represents 100 shares.
4. If the option is not used (exercised) before the expiration date it becomes worthless.
5. Option holders do not have rights of stockholders – e.g., voting rights, regular cash or special dividends
6. Option’s expiration is the Saturday following the third Friday of each month.

An option contract allows a trader to control a greater amount of stock for less money. One thousand shares at $150 is $150,000. But ten options contracts controls those same 1000 shares for probably a few hundred dollars. Option allow tremendous leverage. The strike price, is a fixed price that allows the option holder to buy or sell the underlying stock at a certain price. The premium is the price (cost) of the contract and changes daily due to the forces of supply and demand of the market.

Buying/trading puts is less risky than selling short (selling short is when an investor borrows stock from a broker, sells it and then buys it back at a later date to repay the broker). With put options you cannot lose more than your initial investment which allows you to control risk.

Options trading is extremely risky and very difficult and should only be attempted after several months of studying and trading stocks. Upwards of 80% of options expire worthless. Which means people lost a lot of money.

A trader would buy and sell options in order to profit from large moves in the underlying stock’s price. If a trader feels that a stock or even the NASDAQ, NYSE, AMEX etc is going to drop then they will buy put options on the individual stock or the particular market. When and if the stock or market drops the value of the put options will go up in value. Often the percentage the stock drops is only a fraction compared to the percentage increase in value of the option. 10% drop I market could be a 120% increase in put option contract.

Options can be traded just like stocks. You can buy and sell the same option all day long or you can buy options that expire this month, next month or even years into the future. Although now is the ideal time to trade put options due to the huge drops in the market one can definitely lose a ton of money in a matter of hours. Definitely spend a lot of time studying options before trying to trade them.

-More info- Put option trading recommendations?
Read more at the Motley Fool

Expanded info on put option trading coming soon-thanks for visiting!