When buying a call option, is the financial stability of the option writer relevant?
In the case of regulated, exchange-traded options, the writer of an options contract is obliged to maintain a margin with their broker, and the broker is obliged to maintain a margin with the clearing house.  (Institutional writers of options will deal directly with the clearing house.) In the event that the writer is unable to make a daily margin call, the broker (or clearing house) may automatically close out (all of) their positions using existing margin held.  If there was a shortfall, the broker (or clearing house) would be left to persue the client (writer) to make good on their obligations. None of this effects the position of the original buyer of the options contract.  Effectively, the buyer's counterparty is their broker's clearing house account. Exchange traded options are issued in a way that there is no counter party risk.  Consider, stocks and options are held in street name. So, for example, if I am short and you are long shares, no matter what happens on my end, your shares are yours.  To be complete, it's possible to enter into a direct deal, where you have a contract for some non-standard option, but that would be very rare for the average investor.
(Note: I am omitting the currency units.  While I strongly suspect it's US$ I don't know from the chart.  The system works the same no matter what the currency.) A call or a put is the right to sell (put) or buy (call) shares at a certain price on a certain day. This is why you see a whole range of prices.  Not all possible stock values are represented, the number of possibilities has to be kept reasonable.  In this case the choices are even units, for an expensive stock they may be spaced even farther apart than this. The top of the chart says it's for June.  It's actually the third Friday in the month, June 15th in this case.  Thus these are bets on how the stock will move in the next 10 days. While the numbers are per share you can only trade options in lots of 100. The left side of the chart shows calls.  Suppose you sell a call at 19 (the top of the chart)  The last such trade would have gotten you a premium of 9.70 per share (the flip side of this is when the third friday rolls around it will most likely be exercised and they'll be paying you only 19 a share for a stock now trading at something over 26.)  Note the volume, bid and ask columns though--you're not going to get 9.70 for such a call as there is no buyer.  The most anybody is offering at present is 7.80 a share. Now, lets look farther down in the chart--say, a strike price of 30.  The last trade was only .10--people think it's very unlikely that FB will rise above 30 to make this option worthwhile and thus you get very little for being willing to sell at that price.  If FB stays at 26 the option will expire worthless and go away.  If it's up to 31 when the 15th rolls around they'll exercise the option, take your shares and pay you 30 for them.  Note that you already gave permission for the trade by selling the call, you can't back out later if it becomes a bad deal. Going over to the other side of the chart with the puts: Here the transaction goes the other way, come the 15th they have the option of selling you the shares for the strike price.  Lets look at the same values we did before.  19?  There's no trading, you can't do it. 30?  Here you will collect 3.20 for selling the put.  Come the 15th they have the right to sell you the stock for 30 a share.  If it's still 26 they're certainly going to do so, but if it's up to 31 it's worthless and you pocket the 3.20 Note that you will normally not be allowed to sell a call if you don't own the shares in question.  This is a safety measure as the risk in selling a call without the stock is infinite.  If the stock somehow zoomed up to 10,000 when the 15th rolls around you would have to come up with the shares and the only way you could get them is buy them on the open market--you would have to come up with a million dollars.  If there simply aren't enough shares available to cover the calls the result is catastrophic--whoever owns the shares simply gets to dictate terms to you.  (And in the days of old this sometimes happened.) If it helps you to think about it, long is equivalent to betting for the upside and short is equivalent to betting for the downside. If you are long on options, then you expect the value of such options to increase.  If you are long an option, then you own the option.  If you are short an option, then generally you sold the option.  Someone who is short a call (sometimes called the writer or occasionally the issuer) has sold a call option to someone who is now long a call. Buying a call option that will increase in value is itself a form of investment, just as it's investment to buy stock or other instruments hoping they will appreciate in value.  An option's value will rise or fall with the underlying, so being long an option is a way to be long in the underlying.  Someone can be long in a stock by buying the stock, or long in a call by buying call options in the stock.  The long call generally requires less initial investment than buying the underlying, and lets the option-holder avoid the asset downside during the option term.  The risk is that the asset may not appreciate to the point that the call option will pay off. In the conceptual sense, a share of stock is a particular right to the profits and assets of a corporation, both in form of dividends and in liquidation.  An option is a particular right to the the share of stock.  It's just a further way to formalize and subdivide the various property rights that exist in a corporation.  If you can buy a piece of paper with particular rights to corporate profits and assets, then you can buy another piece of paper with particular rights to the former piece of paper. What financial instruments are there that are profitable when an underlying assets falls? The instrument you are looking for is called an Option, specifically a Put Option. It allows you, within the validity date, to sell ('Put') the respective shares to the option giver, at the predefined Strike Price. For example, let's assume APPL trades currently at 100 $ per share, and you think they will go down a lot. You buy one Put Option for 100 shares (they always come for larger amounts like 100s) for a Strike Price of 90 $, and pay 5 $ for it (it would be cheap if nobody believes they will fall that much). Note the last sentence under 2. - it is rather easy and very common when trading options to make complete losses. You have been warned. Are they available for IPOs? They could be available for IPOs, even before the IPO. However, someone has to put them out (some large bank, typically), which is some effort, and they would only do that if they expect enough interest and volume in the trade. most of the time, there will be no such options on the market. Are they available for foreign stocks?Yes, but again only selectively - only if the stock is well known and interesting enough for a broad audience. "The two dimensions are to open the trade (creating a position) and to buy or sell (becoming long or short the option). If you already own an option, you bought it to open and then you would sell it to close. If you don't own an option, you can either buy it to open, or sell it (short it) to open. If you are already short an option, you can buy it back to close. If you sell to open covered, the point is you're creating a ""covered call"" which means you own the stock, and then sell a call. Since you own the stock, the covered call has a lot of the risk of loss removed, though it also subtracts much of the reward possible from your stock." Yes. It seems to me you got it right.  On my site, Stock Options Cafe, my last post was an illustration of a bullish call spread. In this case, I bought a 50 call, and sold the 60 call. This is a debit order as I was paying money, not collecting a new premium. "I have a Roth IRA with Scottrade, and they allow me to write cash secured puts, as well as covered calls. I can also purchase calls or puts, if I choose. When I write a cash secured put, it automatically deducts the amount required to purchase the shares at the strike price from my ""cash available for transactions""." "There are two reasons why most options aren't exercised.  The first is obvious, and the second, less so. The obvious: An option that's practically worthless doesn't get exercised. Options that reach expiry and remain unexercised are almost always worthless bets that simply didn't pay off. This includes calls with strikes above the current underlying price, and puts with strikes below it. A heck of a lot of options. If an option with value was somehow left to expire, it was probably a mistake, or else the transaction costs outweighed the value remaining; not quite worthless, but not ""worth it"" either. The less obvious: An option with value can be cancelled any time before expiration. A trader that buys an option may at some point show a gain sooner than anticipated, or a loss in excess of his tolerance. If a gain, he may want to sell before expiry to realize the gain sooner. Similarly, if a loss, he may want to take the loss sooner. In both cases, his capital is freed up and he can take another position. And — this is the key part — the other end matched up with that option sale is often a buyer that had created (written) exactly such an option contract in the first place – the option writer – and who is looking to get out of his position. Option writers are the traders responsible, in the first place, for creating options and increasing the ""open interest.""  Anybody with the right kind and level of options trading account can do this. A trader that writes an option does so by instructing his broker to ""sell to open"" a new instance of the option. The trader then has a short position (negative quantity) in that option, and all the while may be subject to the obligations that match the option's exercise rights. The only way for the option writer to get out of that short position and its obligations are these: Not by choice:  To get assigned. That is to say: a buyer exercised the option. The writer has to fulfill his obligation by delivering the underlying (if a call) to the option holder, or buying the underlying (if a put) from the option holder. Not by choice: The option expires worthless. This is the ideal scenario for a writer because 100% of the premium received (less transaction costs) is profit. By choice: The writer is free to buy back exactly the same kind of option before expiry using a ""buy to close"" order with their broker. Once the option has been purchased with a ""buy to close"", it eliminates the short position and obligation.  The option is cancelled.  The open interest declines. Options thus cancelled just don't live long enough to either expire or be exercised." Thanks. Just to clarify I am looking for a more value-neutral answer in terms of things like Sharpe ratios. I think it's an oversimplification to say that on average you lose money because of put options - even if they expire uselessly 90% of the time, they still have some expected payoff that kicks in 10% of the time, and if the price is less than the expected payoff you will earn money in the long term by investing in put options (I am sure you know this as a PhD student I just wanted to get it out there.)I guess more formally my question would be are there studies on whether options prices correspond well to the diversification benefits they offer from an MPT point of view.