Calls

• A call option gives an investor the right to purchase a stock at a certain price before a specific date in the future. For example, if you were to purchase a 30 July call option on Boeing, you could buy the stock at $30, the strike price, any time before the third Friday in July, the expiration date. If the price of Boeing rose to $40 in the open market, you could exercise your call option to buy Boeing at $30, and turn around and sell it on the open market at $40, making a profit of $10. If you didn't want to buy the stock, you could sell your call option before its expiration date to another investor for a profit because this option is now "in the money."
  
  If the price of Boeing never rose above $30, the call option would be worthless, because nobody would buy an option that let him purchase at $30 when he could buy it cheaper in the open market.
  
  

Puts

• Put options allow an investor to make a profit in a down market. A put option gives the investor the right to sell a stock at a specific price on or before the expiration date of the option. As an example, if you were to purchase a 20 August put option on Home Depot, you could sell the stock for $20 any time before the third Friday in August. If the price for Home Depot fell below $20, say $15, any time before the expiration date, you could purchase the stock in the open market at $15 and sell it for $20, making a profit of $5. You do not have to buy the stock and sell it yourself; you could simply sell the put option (because it would now be in the money) and make your profit.
  
  If the price of Home Depot never goes below $20 before the expiration date, the option would expire worthless.
  
  

Writing Covered Calls

• Instead of buying a call option, you could sell a call option on a stock you already own. This strategy is used to generate additional income when you expect your stock to continue to rise in the long term, but not before the call option's expiration date. If the price of your stock does not rise above the strike price before the expiration date, the option would expire worthless, and you would get to keep the premium from selling the call option. Because you still own the stock, you could sell another call option and continue to generate income.
  
  

Terms

• Put and call options are sold in 100-share lots and have expiration dates ranging from 30 days to one year. An attractive feature of options is that they can be purchased for as little as 10 percent of the value of the contract (100 times the share price). This allows the investor to highly leverage his funds and possibly earn high returns. The downside is that the options have expiration dates and can expire worthless, whereas an investor can hold a stock forever if he chooses.