Use of option trading is the best when the volatility is at high levels and the stop loss point on a particular stock is about the same price as the cost of an option.

In this manner, if an options position is used instead of a stock position, even if the trade goes wrong, the swing trader will have a second chance. Also, it's not how expensive or undervalued the option is relative to the Black-Scholes model that makes the option attractive or not, it is getting the direction right regardless of the price of the option. Both of these theories underpins our day and swing trading strategies.

Our first definition of "call options" is a contract giving the holder the right to buy 100 shares of the underlying security within a certain time frame. The concept is like leasing a car or the underlying security. You have the right to buy this car at the end of the term so instead of paying the whole car up front, you pay it to the financing company by monthly installments. This is analogous to buying a call option on IBM for 30 days instead of buying 100 shares of the stock. Your car lease expires at the end of the term and just like an option, you may exercise it, (buy the car or buy the stock), or just let it expire, (give back the car or do nothing on the options side.) It is that simple.

"Put options" are the opposite as it gives you the right to sell 100 shares of the underlying stock also within a certain time frame and at a certain price. This is like term insurance in that if the stock falls below this price, (called "strike price"), you will be guaranteed to sell at your strike price. Obviously the shorter the time you buy protection, the cheaper you pay. A one month premium is less expensive than two months and so on. Theoretically, if you want downside protection for an infinite time frame, then the premium will equal the price of the shorted stock.

Both these definitions are for buying calls and puts as the buyer has the right to exercise or sell their options at any time prior to the options expiration, (the period one has purchased for.) On the flip side, someone has sold these options to you. The seller is "obligated" or will guaranteed the other side of the trade. So if you happened to buy an Intel Nov 25 call option giving you the right to buy 100 shares of Intel at $25 till the third Friday of November, the person that sold you this option has to sell you this 100 shares at $25 at any time you come knocking prior or on the expiration date, (which is once again, the third Friday of the contract month which in this case is November.) Please remember that a buyer has the right while a seller is obligated as this is a very important distinction.