Option Strategy Basics

An option is a contract giving the buyer the right, but not the obligation, to buy or sell an underlying asset at a fixed price on or before a certain date. If, over the life of the contract, the asset value decreases, the buyer can simply elect not to exercise his/her right to buy/sell the asset. There are two types of option contracts - Call options and Put options. A Call option gives the buyer the right to buy the underlying asset, while a Put option gives the buyer the right to sell the underlying asset. There are four types of participants in options markets: Buyers of calls, Sellers of calls, and Buyers of puts and Sellers of puts. People usually use option for hedging and speculation. Option strategy can be:

• Long (buy), where you do long call in bullish condition and long put in bearish condition.
• Short (sell), where you do shot put in bullish condition and short call in bearish condition.

The basic strategy for option is call and put. When you believe that a stock if going to be up next year, buy call option. But if you believe the price will go down next year, buy call option.