When you begin to learn how to trade options, understanding the terminology will be an important part of your success.  The options market uses a lot of strange terms to explain things.  And unfortunately for the investor learning how to trade options, there is no one to explain things to you as you go.  You will be getting thrown in the deep end without water wings.  It is vital that you understand what all the common terms mean before you invest a lot of money into being a trader.  It is not difficult to learn how to trade options these days, but understanding the language is often overlooked.

Call Option:  This is an important term to know when you teach yourself how to trade options.  This is an option that gives you, the buyer, the right to buy a specific stock at a predetermined price before the expiration date of the option.  You don’t have an obligation to buy it, but you will lose the initial investment if you don’t.

Put Option:  This is the exact opposite of a call option.  This gives you the right, but not obligations, to sell a specific stock at a predetermined price before the option expires.

Holder:  This is you, the buyer of the option.

Premium:  This is the amount that you as the buyer pay for the option to the seller.

Writer:  This is another term for the seller of the option.

Strike Price:  This is the predetermined price that you can buy or sell the underlying asset for.  This can also be called an exercise price.  Put most simply, if you bought an option that allows you to sell the underlying stocks at $20 a share, the $20 is the strike price.

At-the-money:  A call option is considered to be at the money when the underlying stocks price equals the strike price, or is at least close to equally it.  So if your option lets you buy the stock at $20 a share, and the current price is $20, this option is at the money.

In-the-money:  This is when the underlying stock price is greater than the strike price.  If your strike price is at $78, and the underlying stock’s price is at $80 the call option is considered to be in the money.  This is the perfect time to buy the stocks under your option price; you can buy it and immediately sell it for a profit.

Out-of-the-money:  A call option is out of the money when the strike price is greater than the underlying stock price.  This would be a bad time to buy the stocks at the option price, since you’d be spending more money.

Assigned: This is a notification that the option buyer has exercised his or her rights.  The person who receives this notification is required to honor and fulfill the terms of the contract.

Covered call: This is a call option that has been sold and is backed by an equivalent number of shares in stock.

Uncovered call:  This is a call option that is sold without owning the underlying stock shares.  It can also be a called a naked call.

Rolling a Position:  Rolling a position indicates the process of buying an option that had previously been sold, and selling a different option that has a more distance expiration date.  This is very often done when an option is near the expiration.