Like futures, options are contracts. Options come in two flavors: calls and puts. A call is an agreement that gives the buyer the right to "call away" from the seller the underlying futures contract or stock at a specified price and at any time prior to the call's expiration date. A put gives the buyer the right to force the seller to purchase a given number of futures contracts or shares of stock at a specified price and at any time prior to the expiration date.
A trader who sells a "covered call" already owns the underlying security. For example, the owner of 100 shares of IBM might sell an IBM call which entitles the buyer to call away the seller's stock. Selling a naked call is when the call is sold without owning the underlying stock. If the call is exercised, the seller of the naked call is obligated to purchase the stock at the current, prevailing price and provide it to the buyer of the call at the call's strike price. The meaning of the term strike price is illustrated by the following: Buying an IBM call with a strike price of 150 and an expiration 3 months into the future means having the right to get from the seller the specified number of shares of the underlying security at 150, regardless of current market value.
Like futures, , calls and puts have been standardized and are traded on regulated exchanges. Like stocks and futures, they are identified by ticker symbol. For stock options, the option ticker is usually constructed by appending two letters to the stock symbol, or to some abbreviation thereof when longer than three characters. The first of the two appended letters specifies the strike price. The second letter indicates the expiration month, and whether the option is a put or a call. As with futures, options generally expire on the third Friday of the expiration month, so the full expiration date need not be specified.
Strike price, expiration date, and the underlying security are all characteristics of options, in the sense of being aspects of the option contract itself or specifications thereof. For the trader, there are other characteristics that are relevant. These concern the way options behave in trading: how they respond to volatility, price change, and time.
