Beginning investor, questions about options.?

Question

Ok, I know that I shouldn't be, and WON'T be, buying stock options anytime soon. as I just opened my first online trading account.. but I would like a break down of different options one can buy...
I know of Put Options... and that there are other types.. but please give me a general description of each major type and what they do. thanks!

Answer 1

The two major types of options are Puts and Calls. A Call gives the purchaser the right to buy a stock at the strike price. A Put Option gives the buyer the right to force the other party to buy at the strike price. When you buy a Call, you are betting the price goes up. When you buy a put, you are betting the price goes down.

Puts and Calls can be either European Options or American Options. The name has nothing to do with where they were created. European Options can only be exercized on the expiration date. American Options can be exercized any time up to expiration. Most exchange traded options are American. Most OTC options are contracts between two parties & are European.

There are other types of options . Some pay off the average price during a period. Some have a series of dates when they can be exercized. Some have strange rules. Barrier options, for example, can appear or disappear by breaking through a barrier. For example, the Up & Out option is like a call option, but if the asset price breaks through an upper barrier, it becomes worthless. The Down & In option works the other way around. It does not pay unless the asset price goes down -- breaking through a barrier & then comes up over the strike price. These are more rare. Do a search on "Exotic Options" for more details.