You buy and sell options through a full-service
or discount brokerage firm, either online or by talking to your
broker. Since options are contracts that must be settled, exercising
an option is somewhat more complicated than buying or selling
shares of stock. And the standards for opening an account you
can use to trade options may be more stringent than for an ordinary
brokerage
account.
Open and close
When you begin trading options, whether you buy
or sell a contract, you're establishing an open position.
That means that you've created one side of a new contract
and will be matched anonymously with a buyer or seller on the
other side of the transaction. If you already hold an option or
have written one, but want to get out of the contract, you can
close your position, which means either buying the same contract
you sold, or selling the same contract you bought.
Since all options transactions, whether opening
or closing, must go through your
brokerage
firm,
you'll incur transaction fees and commissions.
It's important to account for the impact of these charges
when calculating the potential profit and loss of an options strategy.
Naming
names
Specific options are identified with 2 elements: a
3-letter symbol usually the same as or similar to
the stock symbol, and a dollar value. For example,
an option on stock XYZ with a strike price of $25
would be identified as an XYZ 25. When the expiration
date is included in the description, the month is
inserted between the symbol and the price, making
it an XYZ February 25.
Open and close 