All stories should start at the beginning, so the option basics you should begin with are the definitions of terms that pervade all options trading.
Option Definition – An option is a right, but not an obligation, to buy or sell and underlying asset at a specific price and on or by a stated expiration date.
Call Option – A call options is the right, but not the obligation, to purchase an underlying futures contract at a specified price at a specified time.
Put Option – A put option is the right, but not the obligation, to sell an underlying futures contract at a specified price at a specified time.
Option Premium – The premium is the price you pay for the option. It represents the maximum risk you experience when you don’t exercise the option.
Strike Price – The predetermined price in the options contract at which the underlying asset is bought or sold.
At the Money – An option is at the money when the strike price is close or equal to the current futures price.
In the Money – An option is in the money when the strike price is less than the market price of the underlying security.
Out of the Money – The call option is out of the money when the strike price is higher than the market price of the underlying security. Puts are out of the money if the strike price is less than the market price of the underlying security.
Delta – A measure of the effect of change in the price of the underlying asset on the option’s premium. It represents the amount of the change in the price of an option for each move in the price of the underlying asset equal to one point.
Volatility – A measure of how fast and by how much prices of the underlying asset change. It is a measure of the rate of price fluctuations.