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Many investors shy away from options because they seem too complicated or risky. The truth is that options can be quite simple and straightforward to use.
And they can even be part of a conservative investment plan.
That's right, a conservative investment plan.
No doubt, there are a lot of jargony terms in the options world. But there is no need to fear them.
In fact, knowing just a couple of these words could help you hedge your existing portfolio – or even make a small fortune if you decide to "swing for the fences."
Let's go over the most important terms for beginning options traders. The important point to remember is that you are not trying to scalp every last cent out of your trade. Rather, you are looking to make a difference in your investment success.
Here we go – we'll start with the big four that you must know.
The Big Four Options Trading Terms
Type of option – There are two types of options: "calls" and "puts." Calls give the holder the right, but not the obligation, to buy the underlying stock at a specific price by a specific date. Puts give the holder the right, but not the obligation, to sell the underlying stock at a specific price by a specific date.
Strike price – The strike price is the specified price at which you can exercise the option. For calls, if the strike price is above the current price of the underlying stock, then it is "out of the money." If it is below the price of the stock, then it is "in the money." For puts, it is the reverse.
Expiration date – Also called the "exercise date," this is the date at which the option becomes null and void. It will either be in the money, in which case it is automatically exercised, or out of the money, in which case it expires worthless.
Premium – This is the price the buyer pays for the option. It is not the same as the money needed to exercise the option.
Whether you already knew these or you are a beginner, a refresher can only help. Now, let's move on to the "Greeks," which are essentially derivatives of the big four.
You might know these as some of the more jargony terms in options trading. But they can all make sense together once you realize one simple thing…