CHAPTER 1 
Definitions 
The successful implementation of various investment strategies necessitates a sound 
working knowledge of the fundamentals of options and option trading. The option 
strategist must be familiar with a wide range of the basic aspects of stock options 
how the price of an option behaves under certain conditions or how the markets 
function. A thorough understanding of the rudiments and of the strategies helps the 
investor who is not familiar with options to decide not only whether a strategy seems 
desirable, but also - and more important - whether it is suitable. Determining suit­
ability is nothing new to stock market investors, for stocks themselves are not suitable 
for every investor. For example, if the investor's primary objectives are income and 
safety of principal, then bonds, rather than stocks, would be more suitable. The need 
to assess the suitability of options is especially important: Option buyers can lose their 
entire investment in a short time, and uncovered option writers may be subjected to 
large financial risks. Despite follow-up methods designed to limit risk, the individual 
investor must decide whether option trading is suitable for his or her financial situa­
tion and investment objective. 
ELEMENTARY DEFINITIONS 
A stock option is the right to buy or sell a particular stock at a certain price for a lim­
ited period of time. The stock in question is called the underlying security. A call 
option gives the owner ( or holder) the right to buy the underlying security, while a 
put option gives the holder the right to sell the underlying security. The price at 
which the stock may be bought or sold is the exercise price, also called the striking 
price. (In the listed options market, "exercise price" and "striking price" are synony­
mous.) A stock option affords this right to buy or sell for only a limited period of time; 
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