The last hour of trading on the third Friday of March, June, September and December, when investors rush to unwind their positions in index options and futures, all of which are expiring on the same day. Triple witching hour has produced some major price swings as investors buy and sell both the derivatives and the underlying securities.
There are two types of options to consider:
Call Option — A call is an option contract that gives you the right (but not the obligation) to buy or sell a 100 shares of a specific stock at a set price (called the "strike price") within a preset time period. If the stock fails to climb above the strike price before the expiration date, the option is worthless. Buying options is a way to leverage your capital, since the price you pay (the "premium") is far less than the cost of buying the shares themselves, but they're risky since the investment is worthless if the stock doesn't cross your strike price. In short, a call option is a bet that the price of the underlying investment is going to get higher than a Grateful Dead groupie.
For example, you might see a listing that looks like this: DELL
December 80 Call @ $3. This is a call option with a strike price of $80. In other words, if you own this option, you can buy DELL at $80, even if it is then trading on the NYSE @ $90. If you want to buy the option, it will cost you $300 plus broker's commissions. The option in this example expires on the Saturday following the third Friday of December in the year it was purchased.
Put Option — A put option is a contract that gives the buyer the right (but not the obligation) to sell the underlying item at the strike price until the expiration. Selling a put means you'll agree to buy the underlying stock at whatever strike price.
Say stock ABC is trading at $50. You might sell a put at $40. If the stock stays above $40 before expiring, you win and the put is worthless — the premium you got for selling the put is yours to keep. But if the stock drops to, say $35, you're on the hook because you sold the put buyer the right to sell at $40 — your loss is $500 (the difference between $35 and $40 comes out of your pocket).
