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The price at which an option is offered for sale.

An option with a strike price equal to the price of the underlying instrument.

The price at which someone is willing to purchase an option.

The price which an underlying instrument must reach in order to produce an intrinsic value in the option equal to the buyer's cost of initiating the position. Calculating the break-even price helps you make an intelligent decision about whether to buy the option.

The buyer of a call acquires the right, but not the obligation, to purchase a set amount of an underlying instrument at a stated price at any time during the life of the option. Buyers of call options are looking to profit from an increase in the price of the underlying instrument.

Cash account

Your securities account with a brokerage firm wherein you pay for your purchases in full.

The sum of money, per option purchased, that you pay the brokerage firm for its services, including the execution of your order on the exchange. The commission charge is in addition to the option premium and should be separately stated.

A price is moving in a downtrend, when it makes lower highs and lower lows. A down trendline is considered to be a line of negative influence, drawn by connecting lower highs.

Exercising a put means you are electing to sell the underlying instrument at the option strike price. Exercising a call means you are electing to purchase the underlying instrument at the option strike price. If you choose to exercise your option you are taking a position in the underlying instrument and -- unless you instruct your broker to immediately offset that position -- the risks associated with holding such a position. You should fully understand those risks prior to making the decision to exercise an option.

The last day on which an option can be exercised or offset. Make sure you know the exact expiration date of any option you purchase. Once an option has expired it no longer conveys any rights and, in effect, ceases to exist.

Hedge is Wall Street's magic word symbolizing protection when risk is assumed. For example, the owner of shares of a volatile stock, which has experienced a sharp run-up, can protect his profits by purchasing a put option.

An option with intrinsic value. An in-the-money call option has a strike price below the price of the underlying instrument. An in-the-money put option has a strike price above the price of the underlying instrument.

Also known as real value or minimum value. Only in-the-money options possess intrinsic value. The intrinsic value of an in-the-money call option is the price of the underlying instrument minus the option strike price. The intrinsic value of an in-the-money put option is the option strike price minus the price of the underlying instrument.

Acronym for Long-term Equity AnticiPation Securities. LEAPS are very similar to standard options except for the fact that they expire much further in the future. They can be safer than traditional options because it is somewhat easier to predict stock movement over longer periods. Like options, they allow an investor to lock in a fixed price for the underlying security. Therefore, like options, they can be effective for both leverage and insurance purposes. Expiration generally occurs 36 months after purchase, and LEAPS are American style, so they can be exercised at any time before expiration. Strike prices usually range around 25% above or below the price of the underlying stock when the LEAP is first offered.

The use of other people's money to try to make more money than if you just used your own. Leverage can enhance the rewards when you are right, but it may also substantially accelerate the risk of additional loss when you are wrong.

A buy order to purchase an option at or below a specified price. A sell order to sell an option at or above a specified price. Always use limit orders to open a position, because you are certain of your maximum risk; however, there is no guarantee that your desired option will be bought.

The purchase of a security in expectation of profiting from a rise in its price.

Margin accounts involve borrowing money from the brokerage firm to make securities purchases and paying interest on that loan. Margin exposes you to unlimited risk. In the type of options trading recommended in the Options Hotline (buying options to open, selling them to close), you are never exposed to margin risk.

An order to purchase an option synonymous with telling your broker to "do his best" as quickly as possible. Avoid using market orders to initiate positions, because you are uncertain of your risk.

Provide liquidity in options trading by risking their own capital to take the opposite side of public orders.

The Options Clearing Corporation is the issuer of securities options and is the entity through which all options transactions on the Chicago Board Options Exchange (CBOE) are ultimately cleared. The OCC allows options traders to buy and sell in a secondary market without having to find the original opposite party.

You can close out a position in a previously purchased option by selling it in an offsetting transaction prior to expiration. Most options market participants choose to realize their profits or limit their losses through an offsetting sale rather than exercise. If your option has gotten deep in-the-money you may need to instruct your broker to exercise your option and "immediately offset" to capture the option's intrinsic value. A call buyer would exercise his call (purchase the underlying instrument at the strike price) and immediately sell the underlying instrument at the higher going market price to lock-in value. A put buyer would exercise his put (sell the underlying instrument at the strike price) and immediately buy back the underlying at the lower going market price to lock-in value.

The total long or short positions (always equal) at a given moment.

Other people's money, used to provide leverage in financial transactions.

An option is the right, but not the obligation, to buy or sell the underlying instrument at a specific price for a predetermined time. There are two types of options: puts and calls.

An option with no intrinsic value. An out-of-the-money call option has a strike price above the price of the underlying instrument. An out-of-the-money put option has a strike price below the price of the underlying instrument. The premium for out-of-the-money options is for time and volatility.

The actual price an option buyer pays for the privilege of receiving whatever put or call he is interested in. The premium is the sum of an option's intrinsic value and time value. Premiums are arrived at through the open competition of buyers and sellers. Often premiums are quoted on a per share basis. So if you see an option quoted at $4 1/2, multiply that by 100 shares per option to give you an actual premium of $450 per option.

The buyer of a put acquires the right, but not the obligation, to sell a set amount of an underlying instrument at a stated price at any time during the life of the option. Buyers of put options are looking to profit from a decrease in the price of the underlying instrument.

An area of expected selling.

The sale of a security in anticipation of profiting from a fall in its price.

Made up of two or more options in the same stock where either the strike price, the expiration date or both are different. Spread can limit or alter risk while returning a profit when the gains from one or more option offset the losses from the rest.

An order placed to stop a loss. A stop-loss order becomes a market order if the price of the item goes though the stop.

Provides the opportunity to profit from a prediction about the future volatility of the market. Long straddles are used to profit from high volatility. Such a straddle can be effective when an investor is confident that a stock price will change straddles represent the opposite prediction that a stock price will not change.

Also known as the striking price or the exercise price, this is the specific price at which the buyer of a call may purchase the underlying instrument and the buyer of a put may sell the underlying instrument.

The art of using other people's money to try to profit, while maintaining limited risk at all times. Superleverage is synonymous with the purchase of put and call options.

An area of expected buying.

Also known as extrinsic value, that portion of the option premium over and above the intrinsic value of the option if it was exercised and liquidated. Out-of-the-money options have only time value. In-the-money options may have intrinsic value and time value. Some deep in-the-money options may have a negative time value. Time value is a function of various factors, including time till expiration and the volatility of the underlying instrument.

When the option moves in your favor, you can adjust your stop higher to try to lock-in profits in case the market reverses. Be aware that some profitable trades may reverse, trigger the trailing stop, and then resume their move. Others will simply keep reversing.

The stock, index, future, or other financial vehicle, which the option buyer purchases the right to buy or sell.

A price is moving in an uptrend, when it makes higher highs and higher lows. An up trendline is considered to be a line of positive influence, drawn by connecting higher lows.

A measure of the change in price of an option or underlying instrument over time.

The number of a particular security traded over a specific period of time.

Also known as the seller, underwriter, and grantor. These risk-takers are the legal bookmakers in a giant legal casino. The writer of an option is granting the rights of the option to the buyer. For taking on this obligation, the option writer receives the option premium as his reward.

-- I. McKay

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