Options are defined by four factors:

1. Type (call or put)

2. Stock or other security the option is based on

3. Expiration date

4. Strike price (price at which the option can be exercised)

Call options are the right to buy a security for the strike (or striking) price. Therefore, buying calls is a bullish strategy. That means you believe the underlying stock price will go up before the expiration date.

Puts are the right to buy a security for the strike price price. Therefore, buying puts is a bearish strategy. That means you believe the underlying stock price will go down before the expiration date.

The stock or other security is called the underlying. It could be IBM, the S&P 500 Index, gold, or other types of financial securities. The expiration date is obvious. It can be a day or a month in the future. It's always the third Friday of the month.

Stocks have expiration dates four times a year, every 3 months:

1. January/April/July/October

2. February/May/August/November

3. March/June/September/December

Most stocks don't have options more than 9 months in the future. But some do have long term options, called LEAPS.

Striking prices for most stocks are set $5 apart. When a stock gets over $100, the strikes are set at $10 apart. Stocks selling for under $35 have strikes $2.50 apart. (These rules are sometimes changed to improve market depth and liquidity.)

When the strike price of an option is already past the market price of the underlying security, the option is in the money. If you own a $55 call on IBM when its market price is $55, your call is $4 in the money. If you own a $55 call on

IBM when its market price is $53, your call is $2 out of the money.

Why buy options? Leverage. If you believe a stock or other security is going to go up or down before the expiration date, you can make a lot more money trading options than with more conventional investment methods. If you believe a stock price is going to go up soon, you can buy shares of the stock. If the price is currently $60, that'll cost you $6000. Yet you may be able to buy 1 option contract for just $200. If you're right, and the price goes up to $65, the stock buyer gains $500, or 8.5%. Your option could go up to $700 -- a gain of 350%.

Leverage works the same for put options, with the added advantage that it's a lot easier and less risky to buy puts on a stock than to sell it short.

Back when options were sold over-the-counter, there was a direct transaction between option buyers and sellers. However, now all option contracts are standardized, and the Options Clearing Corporation issues and guarantees all option contracts.

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