What are stock options
What are stock optionsYou buy or trade stocks, bonds and mutual funds. Some investors use options on stocks or cash indexes to protect and insure the value of their portfolios. A major advantage of options is their flexibility.
You can protect stock holdings from a decline in market price
You can increase income against current stock holding
You can prepare to buy a stock at a lower price
You can position yourself for a big market move even when you don' t know which way prices will move
You can benefit from a stock price rise without incurring the cost of buying the stock outright
Stock options work much like stocks, options can be used to take a position on the market in an effort to capitalize on an upward or downward market move. Unlike stocks, however, options can provide an investor the benefits of leverage over a position in an individual stock or basket of stocks reflecting the broad market. At the same time, options buyers also can take advantage of predetermined, limited risk. On the other hand, options writers assume significant risk if they do not hedge their positions.
The most basic stock options are buying calls and buying puts. An option is the right, but not the obligation, to buy or sell a stock (or other security) for a specified price on or before a specific date. A call is the right to buy the stock, while a put is the right to sell the stock. The person who purchases an option, whether it is a put or a call, is the option "buyer." the person who originally sells the put or call is the option "seller."
Options are contracts in which the terms of the contract are standardized and give the buyer the right, but not the obligation, to buy or sell a particular asset at a fixed price (the strike price) for a specific period of time or until expiration. To the buyer, an equity call option normally represents the right to buy 100 shares of underlying stock, whereas an equity put option normally represents the right to sell 100 shares of underlying stock. The seller of an option is obligated to perform according to the terms of the options contract-selling the stock at the contracted price for a call seller, or purchasing it for a put seller-if the option is exercised by the buyer. All option contracts trade on U.S. securities exchanges are issued, guaranteed and cleared by the Options Clearing Corporation (OCC). OCC is a registered clearing corporation with the SEC and has received 'AAA' credit rating form Standard & Poor's Corporation. The 'AAA' credit rating corresponds to OCC's ability to fulfill its obligations as counter-party for options trades.
The price of an option is called its "premium." The potential loss to the buyer of an option can be no greater than the initial premium paid for...
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