Options Trading.

When volatility is at high levels and the stop loss point on a particular stock is at about the same price as the cost of an option, Options are the preferred vehicle. Also when volatility increases the option premium, the time spreads are the highest. A contract that gives the holder the right to buy 100 shares of the underlying stock within a certain time frame is called "Call Options". The concept is similar to leasing a car. One has the right to buy this car at the end of the term and instead of paying the whole sum upfront as in buying options, payments are made to the financing company in monthly instalments. When the lease expires at the end of a term and just like an option, the buyer may wish to continue (buy the car or buy the stock), or let it expire (give back the car or do nothing on the options side). It's as simple as that.

A contract, that gives the holder the right to sell 100 shares of the underlying stock within a certain time frame and at a certain price, is called the "Put Options". The investor will be guaranteed a sell at your strike price if the stock falls below this price (called "strike price"). Obviously the amount to pay will be less if the time bought for protection is shorter. A one month premium costs less that a two months premium and so on. In theory, if a downside protection for an infinite time period is wanted, then the premium will equal the price of the stock.

Since the buyer has the right to exercise or sell his/her puts at any time prior to the options expiration (the period one has purchased for) both of these definitions are for buying puts and calls. A very important distinction is that a buyer has the right while a seller is obligated.

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