There are two main types of options that are traded. The first kind of option allows an investor to speculate on the underlying asset prices rising. The other type of option allows an investor to speculate on the underlying asset falling. Options can seem like a good idea to traders with small accounts as options typically trade at a fraction of the price of the underlying asset. However, options can become quite complex, especially for new investors.

The 1st type of option is a call option. In simple terms, this is like placing a bet that the underlying asset is going to rise in value. A more professional way of describing a call option is that it gives the investor the right, not the obligation, to buy an underlying security at a fixed price before a predetermined date. Another way of describing call options is that they give an investor the right to buy a stock at a specific price within a fixed period of time.

So when would an investor buy a Call Option?

Many investors buy Call Options because they are Bullish and they expect the stock price to rise. If an investor buys a Call Option with a strike price of $20, then he/she will want the stock price to increase as high as possible above $20.

A put option is the exact opposite of a call option. Put options are like placing bets that the price of the underlying asset is going to fall. Puts can sometimes be a good trading instrument for investors when the investor wants to protect against losses in stock, futures contracts or commodities they already own. Put options give the investor the right to sell a stock at a specific price within a fixed period of time.

Investors typically tend to buy put options because they are bearish and they expect the stock price to decrease. If an investor buys a put option with a strike price of $40, then the investor will want the stock price to drop as low as possible.

The hook of options is that the vast majority of long put and call contracts can expire worthless, and the owners can lose one hundred percent of their investment.