Back to Basics

As I begin the second year of The Liss Report I feel it opportune to go all the way back to option basics. Old and experienced readers may find this boring but readers curious about, and new to, options hopefully will find this interesting.

An option, like a future, is known as a derivative  as it derives its value from an underlying security or commodity. The single most important difference is this; An option is the right and not the obligation to buy (in the form of a call) or sell (in the form of a put) an underlying value at a fixed price at or within a fixed period of time.

Note the important part, "the right and not the obligation".  A future obliges the buyer to take delivery and the seller to make delivery of an underlying value at expiration. If you but the 600 May Apple call and Apple is below 600 you do not exercise the option and it expires worthless. On the other hand, if you buy a pork belly future at 20 and pork bellies are 15 at expiration you have to take physical delivery of pork bellies at 20 unless you sell the future first.
 
So, options are less risky and more flexible than futures, particularly for the buyer. The seller of an option has no control over the decision to make or take delivery. She has yielded that right to the option buyer in exchange for the premium received.

This is why I advise against being a net seller of options and instead always trade in the form of a spread. That is, owning an option (called being long) for every option you have sold (called being short). I will be discussing the various types of option spreads as time goes along.

Pretty simple, eh? Yes, it is. A huge part of what I teach is how simple options trading can be. I am here to simplify and demystify the world of exchange traded options.

And perhaps even gore a Scared Cow or two along the way...