Right or Obligation
The main difference is that options contracts only give the right to buy or sell the underlying commodity, whereas futures contract have the obligation to buy or sell the underlying commodity. The buyer of the options contract can choose whether or not to exercise their right, and if they do, the seller of a matching options contract will be obligated to complete the transaction. The seller to complete the transaction is chosen by the options clearing system, which is the Options Clearing Corporation in the US, and Clearstream Banking (a division of the DTB exchange) in Europe.

Options Contracts
Options markets trade options contracts, which specify the underlying security, the expiration date, and the strike (or exercise) price. Day traders can trade options contracts to make a profit on the difference between the buying price and the selling price (when the options are sold before expiration), or to make a profit from the underlying security when they are exercised.
As with futures contracts, options contracts are traded by day traders and longer term traders, and also by non traders with an interest in the underlying commodity. When traded for the underlying commodity, options contracts work the same way as futures contracts, but only give the right to buy or sell the underlying commodity rather than the obligation.

Call and Put
Options are available as either a Call or a Put, depending upon whether they give the right to buy, or the right to sell. Call options give the holder the right to buy the underlying commodity, and Put options give the right to sell the underlying commodity. The buying or selling right only takes effect when the option is exercised, which can happen on the expiration date (European options), or at any time up until the expiration date (US options).
Like futures markets, options markets can be traded in both directions (up or down). If a trader thinks that the market will go up, they will buy a Call option, and if they think that the market will go down, they will buy a Put option. There are also options strategies that involve buying both a Call and a Put, and in this case the trader does not care which direction the market moves.

Long and Short
With options markets, as with futures markets, long and short refer to the buying and selling of one or more contracts, but unlike futures markets, they do not refer to the direction of the trade. For example, if a futures trade is entered by buying a contract, the trade is a long trade, and the trader wants the price to go up, but with options, a trade can be entered by buying a Put contract, and is still a long trade, even though the trader wants the price to go down.

Symbols and Tick Values
The trading symbol for options markets consists of the underlying, the expiration date, whether the contract is a Call (right to buy) or a Put (right to sell) and the strike (or exercise) price. For example, the DAX Call option that expires in December 2007 with a strike price of 7000 would have the symbol ODAX-Call-200712-7000. The contract specifications for options markets include the minimum price change (known as the tick size), and the point value or multiplier, with which the value per minimum price change can be calculated. Continuing with the previous example, the tick size for the ODAX is 0.1, and the multiplier is 5 EUR, so the value per tick is calculated as 0.1 X 5 EUR = 0.50 EUR per tick. This means that for every 0.1 in price change, an option's profit or loss would change by 0.5 EUR.

So you've heard a lot about options trading, but with all the jargon flying around, you're probably a little confused. Condors, butterflies and bull call spreads, oh my! We aren’t in Kansas anymore, Toto.

The truth is that options are a little more complicated than stocks, but not much. And they are very flexible tools once you master the basics, so you've come to the right place to learn options trading. We'll walk you through the key concepts, and once you've mastered that, we'll teach you about the more sophisticated concepts and strategies you can use.

What Is A Stock Option?

Stock options are simply contracts that give the owner the right to buy (e.g., call option) or sell (e.g., a put option) a stock at a specific price at some time in the future. That price is called the strike price. The period of time could be as short as a day or as long as a couple years, depending on the option. The cool thing about buying an option is you have the right, but not the obligation, to buy or sell that stock.

And for every options buyer there is a seller, who has to take the opposite side of the trade. Unlike the buyer, the seller has the obligation to sell or buy that stock if the buyer exercises his option.

Remember, there are only two types of options: calls and puts. But you can combine them to create dozens of different strategies.

Options are quoted with a bid (what someone is willing to pay) and ask (what someone is willing to sell for) the option. Options may be bought, or sold, using either market orders or limit orders. Since options typically have lower volumes and have wider bid-ask spreads, it's often a good idea to use limit orders when placing a trade to get an execution price in-line with what you are willing to pay.

A single equity option contract represents an option on 100 shares of the underlying stock. Quotes for equity options are multiplied times 100 to yield a total cost for the position.

Strike prices are the stated price per share for which the underlying security may be bought or sold. Equity option strike prices are listed in increments of 1, 2½, 5, or 10 points, depending on their price level.

If a stock option is purchased it is considered to be a debit trade (premium paid). If a stock option is sold, it is considered to be a credit trade (premium collected).