WHAT IS AN OPTION? Copyright © Tanner Larsson http://www.work-at-home-resource-center.comYou buy or trade stocks, bonds and mutual funds. Perhaps you invest in a 401(k) plan. You can us “Options” as part of your short or long term investment objectives.
Did you know you may be using a form of options as a part of your everyday life?
Do you pay a premium every quarter for house, auto, and medical insurance?
You have purchased insurance as a safeguard against a fire in your home, a crash in your car, or large medical bills. Some investors use options on stocks or cash indexes to protect and insure
value of their portfolios.
A major advantage of options is their versatility. They can be as conservative or as speculative as your investing strategy dictates. Options enable you to tailor your position to your own set of circumstances. Consider following benefits of options:
* You can protect stock holdings from a decline in market price.
* You can increase income against current stock holdings.
* You can prepare to buy 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 cost of buying stock outright.
What Is An Option?
An option is a contract giving buyer right, but not obligation, to buy or sell an underlying asset (a stock or index) at a specific price on or before a certain date (listed options are all for 100 shares of particular underlying asset). An option is a security just like a stock or bond, and constitutes a binding contract with strictly defined terms and properties. Listed options have been available since 1973, when Chicago Board Options Exchange, still busiest options exchange in world, first opened.
Options vs. Stocks
In order for you to better understand benefits of trading options, you must first understand some of similarities and differences between options and stocks.
Similarities:
Listed Options are securities, just like stocks.
Options trade like stocks, with buyers making bids and seller making offers.
Options are actively traded in a listed market, just like stocks. They can be bought and sold just like any other security.
Differences:
Options are derivatives, unlike stocks (i.e. options derive their value from something else: underlying security).
