There are two main types of options:

Call Option: This gives you the right to buy a stock at the strike price on or before the expiration date.
Put Option: This gives you the right to sell a stock at the strike price on or before the expiration date.
Here’s how it works in simpler terms:
Call Option Example: Let’s say you believe that the price of Company XYZ’s stock, currently trading at $50 per share, will go up in the next month.

You can buy a call option contract for Company XYZ with a strike price of $55 and an expiration date one month from now. This means you have the right, but not the obligation, to buy Company XYZ’s stock at $55 per share within the next month. If the stock price goes above $55 within that time frame, you can exercise your option to buy the stock at $55 and then sell it at the higher market price, profiting from the difference.
Put Option Example: Conversely, let’s say you believe that the price of Company ABC’s stock, currently trading at $70 per share, will go down in the next month. You can buy a put option contract for Company ABC with a strike price of $65 and an expiration date one month from now. This means you have the right, but not the obligation, to sell Company ABC’s stock at $65 per share within the next month. If the stock price drops below $65 within that time frame, you can exercise your option to sell the stock at $65, even though the market price is lower, thereby profiting from the difference.
In both cases, if your prediction doesn’t come true and the stock price doesn’t move as expected, you can simply let the option expire worthless, and you would lose only the premium (the price you paid for the option contract).
Options trading can be more complex than stock trading because it involves understanding factors like time decay, volatility, and the Greeks (delta, gamma, theta, vega), but these are the basic mechanics to get started. It’s essential to educate yourself further and potentially seek guidance from a financial advisor before engaging in options trading.