A simple strategy to generate income or build positions can be accomplished
using options. For those not familiar, an option represents the right to buy or
sell shares of stock at a specified price during a set time period. The
specified price is known as the strike price, and the time period is set by an
expiration date. Options are bought and sold in units called contracts. One
contract equals 100 shares of stock. The seller of the option is called the
Two types of options are:
- Call options – Each contract gives the buyer the right to buy 100 shares of the
underlying stock at the strike price up until the expiration date.
- Put options – Each contract gives the buyer the right to sell 100 shares of
the underlying stock at the strike price up until the expiration date.
If the buyer exercises the option by the expiration date, then the writer
must either sell to the buyer (call option) or buy from the buyer (put option)
at the contract price, better known as the strike price.