Stock Options provide the holder the right to buy or sell particular shares at a fixed pre-determined price within a fixed period of time. A new investor needs to understand the process of exercising the rights of such options, before embarking on this form of trade. Like any other branch of trade and commerce, Stock Market too has a terminology of its own. For an investor it is necessary to familiarize and know about their applications and implications. Let me begin with the conditions and mood of the market, which is the main concern of the brokers and investors.

A bearish view of the market is when one expects the share price to fall; not of a particular share, but share market as a whole.

A bullish view is exactly the opposite of the above condition. One expects the share market as a whole to rise and show aggressive tendency.

A neutral view is when the share market is neither bullish nor bearish. The movement is very restricted and hence strategies for trading will have to be appropriately modified as per the demand of a particular share. The situational aspects matter much and each decision is on its merits.

The terms that relate to the mechanics and operations are:

Call Options is when all procedures and steps are predetermined as for the right of the holder to buy the underlying share. They refer to the price and the time.

Put Options give the holder the right to sell the underlying stock at a fixed pre-determined price within a certain, fixed period of time.

Strike price is the fixed, pre determined price at which you can trade (both buy and sell) the shares. This cannot be changed throughout the duration of the option contract.

Expiry is the date at which the option contract stands terminated. This cannot be changed throughout the life of the option, and thereafter the contract is null and void.

Most of the shares are never traded at par. You pay premium for the shares doing well in the market and that are assessed to have assured prospects of growth. Premium is the amount that you are willing to pay for the options contract. Each share has set prices for trading. The amount you pay for the share depends on the level of strike price to the current share price. That amount is the premium. Premium is inclusive of both the options time value and the intrinsic value.

Stock option contact's value or premium is decided by various factors. Five such factors are important and are material the contract. They are, the price of the share, the strike price, the date of expiry, the cumulative cost required to hold a position in the stock (inclusive of interest plus dividend) and the estimate of the expected volatility of the share price. The strike price refers to the price at which an underlying share can be sold or purchased. A stock price must go above (for calls) or go below (for puts) the strike price, before a position can be exercised for a profit.

Stock Option contracts can be done for most individual shares that are traded in the Exchanges. The US SEC (Securities and Exchange Commission), however, has implemented restrictions that prevent US traders from trading non US stock options, so US traders can only trade US stock options. The contract must contain the information relating to Symbol, Currency, Exchange, Multiplier, Expiration Date, Last trading Date, Strike Price, Type, Exercise Style, Maximum Size and Tick Size.

Long Term Stock Options (LEAPS)

Most of the options are short term the expiry date being up to 3 months. LEAPS expire anywhere from 9 to 30 months. These are good for long term trades, to seek protection for profit from an existing trade. All other trading procedures are similar.

Forward stock market and contracts are meant for the experienced players in shares. A new investor should desist from exercising these options.