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Options Terms

Call: An option to buy an asset. Investors who buy calls are bullish.

Expiration date: The date on which an option contract expires, usually the third Friday of the option's expiration month.

LEAPS: The acronym stands for Long-Term Equity AnticiPation Securities. LEAPS are just options with terms from 1 to 3 years.

Naked call: Agreement to sell a stock you do not already own. Losses on a naked call can be significant because if a stock rises in price, there's no telling how high it can go.

Option: This gives its buyer the right, but not the obligation, to trade something at a certain price on a certain date. With stock options, each option corresponds to 100 shares of the underlying stock.

Put: An option to sell an asset. Investors who buy puts are bearish.

Premium: The cost of an option contract. For a premium, investors acquire the right to buy or sell a security for a locked-in price within a specified time frame.

Straddle: Buying a put and call option on the same underlying stock with the same strike price and expiration date. Investors use this strategy if they expect the stock or other trading instrument to move sharply before the options' expiration date, but they aren't sure in which direction it will go.

Strangle: Buying a call and put with different strike prices. This costs less than a straddle, but it is also carries more risk.

Strike Price: The price of a stock as specified in an option contract.

Writing an option: Selling a put or a call. Unlike option buyers, option writers are obligated to carry through with their end of the bargain.

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