What is an Option?
An option is a contract that allows you to buy or sell a certain amount of an underlying stock (usually 100 shares) at a specific price for a set amount of time.

Call Option
A call option gives the buyer the right to buy 100 shares at a fixed price (strike price) before a specified date (expiration date).

Put Option
A put option gives the buyer the right to sell 100 shares at a fixed price (strike price) before a specified date (expiration date).

Strike (or Exercise) Price
The strike price is the price per share at which the holder can purchase (for call options) or sell (for put options) the underlying stock.

Exercise
Exercise is the process by which an option holder/owner invokes the terms of the option contract. To exercise, call owners will buy the underlying stock, while put owners will sell the underlying stock under the terms set by the option contract.

Expiration Date
The expiration date is the last day on which the option may be exercised. Listed stock options cease trading on the third Friday of each month and expire the next day.

Hedging
Hedging is a conservative strategy used to reduce investment risk by implementing a transaction that offsets an existing position.

Covered Call
A covered call is another risk-reducing strategy; in this, a call option is written (sold) against an existing stock position on a share-for-share basis.

Intrinsic Value
The price of an option is made up of two parts, the intrinsic value and the time value. The intrinsic value is the amount the option is in the money. For instance an XYZ May 25 Call priced at $3.00 when the stock is trading at $26.50 would have $1.50 of intrinsic value.

Time Value
Time value is the amount of an option’s price that is above the intrinsic value. In the case above with the XYZ May 25 call priced at $3.00 while XYZ stock is trading at $26.50, the intrinsic value is $1.50 and the rest is time value, in this case $1.50. If the option is out of the money (no intrinsic value) then the entire price is considered time value or time premium.

Time Decay
Because options have an expiration date, the time value gradually erodes. This erosion is known as time decay. The closer an option is to expiring, the greater the erosion in value.

Long
To be "long" simply means to own a stock or an option.

Short
Being short has two meanings. If one is short a stock, this means they have sold shares they do not own. To be short an option simply means to have sold the option and collected the premium.

LEAPS (Long-term Equity AnticiPation Securities)
These are long-term options with expiration dates as far out as three years.