A written pact between the buyer and seller is known as an option. This option in turn is associated with a listed stock, an exchange index, future contract or real estate. Options can further be categorized into the European and American style options. While the former can be exercised only on the expiration date, the latter can be exercised at any time between the purchase and expiration date. Options are differentiated by five characteristics: name of the stock, strike price, expiration date, premium and the commission of the broker.

Calls and puts are the two most common options. Call options enable you to purchase the stock at the strike rate at any time before the expiration date. On the other hand, using the put option, you cancel the stock at the strike rate any time before it expires. An option is just a piece of paper after the expiration date, worthless and carrying no value. You can find people who sell options without having owned them before. This is popularly known as writing options.

Writing a call option and owning the stock is called covered call writing, while naked call writing refers to the dealing when you don’t own the stock. Experts call the latter a risky option, since the price of shares can shoot up, leaving you no choice but to buy at the market price. All options are not available at all prices. There are a few selected out-of-the-money options which are not available for sale or purchase.

Option traders don’t exercise the option very often. They prefer to buy back the option if initially they wrote a put, and sell the option if they bought a call. This act saves them a substantial amount on commissions. While most of us work only on weekdays, Saturday is a business day for expiring options, as officially, options expire on the third Saturday of the expiration month