UNDERSTANDING OPTIONS

An Option is part of a class of securities called derivatives. A derivative is a financial instrument which derives its value from an underlying security. This consists of Stocks, ETF and Indexes. The objective of these derivatives was to hedge your risk with the Underlying Security.
What is an Option = A financial contract entered between two parties, the buyer (holder) has a right and the seller (writer) has an obligation.
Options are purchased in a form of Contracts which allows leveraging to a underlying security. One Option Contract controls and equals 100 Shares of Stock.

Benefits of Options

Option Price and Value
What is a Long Call = Right to buy underlying stock at a set price (Strike Price) on or before predetermined date (Expiration). What is a Short Call = Obligation to deliver underlying stock at a set price (Strike Price) on or before predetermined date (Expiration).
What is a Long Put = Right to buy underlying stock at a set price (Strike Price) on or before predetermined date (Expiration). What is a Short Put = Obligation to deliver underlying stock at a set price (Strike Price) on or before predetermined date (Expiration).
The objective of a Call Buyer (holder) is to forecast that a stock will increase and the option value is worth more than the premium paid (Strike Price).
The objective of a Put Buyer (holder) is to forecast that a stock will decrease and the option value is worth more than the premium paid (Strike Price).
The objective of a Call Seller (writer) is to forecast that a stock will decrease and the option value is worth less than the premium received.
The objective of a Put Seller (writer) is to forecast that a stock will increase and the option value is worth less than the premium received.

The premium of an option has two components, Intrinsic (Actual Value) and Extrinsic (Time Value) :-
Calls 
Intrinsic Value = Stock Price - Strike Price
Extrinsic Value = Option Price - Intrinsic Value
Puts
Intrinsic Value = Strike Price - Stock Price
Extrinsic Value = Option Price - Intrinsic Value

The Extrinsic value is the amount the stock price is above the strike price (for calls) or below the strike price for puts. Therefore by definition the amount by which an option is in the money is defined as intrinsic value. Time value is the option premium minus the intrinsic value. It is the amount that you pay for the possibility that it will be worth more in the future. Therefore an at-the-money or out-of-the-money option has no intrinsic value and only time value. At expiration the time value will become worthless if the stock price will be below the strike price (calls) and (puts) will be the reverse, a buyer will have no value left and a seller will keep the premium that he received.

Understanding the Greeks
Trading Options without understanding the Greeks, is a risky undertaking for the retail investor. The Greeks main function is to measure the risk in your position, which allows gauging the profit and loss in your option strategies. Without being aware of the constant changes of the option value, based on Delta, Gamma, Theta, and Vega you may have a losing effect on your option position.

Options Glossary
AMERICAN STYLE OPTION: An option contract that may be exercised at any time between the date of purchase and the expiration date.
HOLDER: Buyer of an option.
WRITER: Seller of an option.
CALL BUYER: An option contract that gives the holder the right to buy at a predetermined price.
CALL SELLER: An option contract that gives the writer the obligation to sell at a predetermined price.
PUT BUYER: An option contract that gives the holder the right to sell at a predetermined price. 
PUT SELLER: An option contract that gives the writer the obligation to buy at a predetermined price.
STRIKE PRICE: The agreed price per share for which the underlying security may be bought or sold.
IN-THE-MONEY: A call option is in-the-money if the strike price is less than the underlying stock price. A put option is in-the-money if the strike price is greater than the underlying stock price.
AT-THE-MONEY: A call and put option is at-the-money if the strike price equals the underlying stock price.
OUT-OF-THE-MONEY: A call option is out-of-the-money if the strike price is greater than the underlying stock price. A put option is out-of-the-money if the strike price is less than the underlying stock price.
INTRINSIC VALUE: The amount by which an option is in-the-money
EXTRINSIC VALUE: The amount by which an option is at-the-money or out-of-the-money
PREMIUM: The price of an option contract, determined in the market, which the buyer of the option pays to the option writer or the seller receives from option holder
TIME VALUE: The portion of the option premium, of the amount of time remaining until the expiration of the option contract. Time value is the value of the option has in addition to its intrinsic value.
TIME DECAY: A term used to describe how the time value of an option can "erode" or reduce the value of the option, with passage of time.
EXERCISE: Allows the holder to exercise an option, at any time prior or on its expiration date. 
ASSIGNMENT: Allows the writer to be assigned, at any time prior or on its expiration date. 
EXPIRATION DATE: The day on which an option contract becomes worthless and canceled. All holders of options must exercise by this date.
BETA: Is the measure of volatility in the market. Beta 1 indicates that the stock price will move with the market. Beta <1 means that the stock will be less volatile than the market. Beta >1 indicates that the stock price will be more volatile than the market. Stock's beta is 1.5, in theory it should be 50% more volatile than the market which will move 50% more than the broad market.
VOLATILITY: A measure of the fluctuation in the market price of the underlying security.


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