An option is a financial derivative.  Please do not let the wording dissuade you from learning about options, they may be the most important part of your investment portfolio.

There are two kinds of Options, a CALL and a PUT. 

A CALL is a contract between parties.  The owner, or buyer of the CALL has a right, but not an obligation, to BUY something, at a specified price and at a specified time in the future, from the seller, or writer of the CALL.  The seller, or writer, of the CALL has an obligation to sell that something, at the specified price, at the specified time, to the owner of the CALL.

A PUT is a contract between parties.  The owner, or buyer of the PUT has a right, but not an obligation, to SELL something, at a specified price, at a specified time in the future, to the seller, or writer of the PUT.  The seller, or writer, of the PUT has an obligation to buy something, at the specified price, at the specified time, from the owner of the PUT.

If you drive a car, you already use options.  By law, you are required to carry insurance.  Insurance is a PUT option on your car.  You pay a premium, your insurance payment, and your insurance company will fix or replace (buy) your car if you get in an accident.  You do not have to use your option, if you do not get into an accident.  Your premium covers you for a set amount of time, a month, a quarter, 6 months or a year.  The insurance company is the seller (writer) of the PUT and you are the buyer. 

I have simplified this example.  To be continued….

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