A contract to buy using options provides the buyer a right but not an obligation to either buy or sell a pre-specified quantity of a given asset. This is set at a specific price before hand on or before a predetermined date. Different than future trading, the option's purchaser has no obligation to either buy or sell for the exercise price and will do so only if it is profitable. Should the option be allowed to lapse, the initial purchase price of the option or (option money) is all the purchaser loses.
The option's specified exercise price, or (strike) is the predetermined price to which an asset could be bought or sold for, if the buyer of the option exercises his right on the option on or before its date of expiration. On options’ trading, the buyer's price used to acquire rights of buying or selling the asset is called the premium. The obligation of the person to buy (put option) or sell (call option) the underlying asset should the buyer decide to make use of his position to exercise his option in the option seller (writer). Trading options in this manner make his profits limited to the premium he receives from the buyer.
The danger here is that potentially his losses can be unlimited. Fluctuations of the premium are in response to the current market value of the exercise (security) price, the period of time between the expiration and the strike, along with supply and demands in the market. The options’ holder is the one who can call or put the option. The potential for his profit is unlimited and he has limited risk of loss held to the premium he paid the writer of the option.
This is the very basics of using options trading. Be sure to continue your education.
Thanks for reading. If you found this article helpful you can get more options trading information , tips, and more articles on my website: http://www.LearningOptionsTrading.com