In most cases, trading stocks involves the direct ownership of shares. If an investor buys 50 shares of a company like Microsoft (NASDAQ: MSFT), they immediately have those shares in their brokerage account.
That’s not the case with options trading. With options trading, traders buy and sell contracts called derivatives, in which they put up money that allows them, but does not obligate them, to buy or sell shares of a stock at a specific date and at a specific price.
Two of the most common derivatives contracts are call options and put options. With that in mind, it’s important to understand some of the key terminologies that is part of options trading.