As with most corners of the trading world, options trading strategy employs relatively obscure and technical nomenclature for trades and assets that can be intimidating to the average investor. In a series of articles, I want to present some of the basic terminology so that we can lay some groundwork for exploring some further option trading strategies down the road. These will be necessary to laying the foundation for understanding some of the common option trades and configuring and using option trading software.

Let's get started...

So what is an "option"? An option is a contract that provides the owner the right, however, not the obligation, to purchase or sell a specific asset at a fixed price for a particular period of time. The asset is generally an underlying stock. That means that the option represents a certain number of shares of a stock and the right to buy or sell a "lot" of that security, generally in 100 share increments. The fixed price is known as the "strike price", "strike", or "exercise price", due to the fact that the owner can exercise the option for that particular set price.

"Expiration date" is rather self-explanatory, but in specific it refers to the date after which the owner or option holder can no longer execute the option trade. Options expiries are generally quoted as a month such as "December". This means that the particular option contract can be exercised up to, generally, the third Friday of the expiration month. This day is known as "expiration Friday".

So what types of options are there and how do we refer to them when discussing options trading strategy. Fundamentally, equity, or stock options, consist of two types. There is the "call option", which provides the option holder the right to buy the underlying asset at a particular price, and the "put option" which is, you guessed it, just the opposite. The put option offers the holder the right to sell at a certain strike price on a certain date in the future.

So now we've explored some of the initial nomenclature regarding the types of options and how their trading is structured in options trading strategy. For example, you might now understand the statement: "I'm holding 100 December 38.00 calls on General Motors". This is a contract that gives the owner the right, but not the obligation, to buy (a call option) 10,000 shares (100 contracts x 100 shares of the underlying stock) of GM stock for $38.00 (the strike price) on the third Friday of December (expiration Friday).

By making an effort to understand some of the fundamental terminology associated with option trading strategies, we can move forward in comprehending the mechanics of some of the fundamental and common trades.