What Are Stock Options?
Options are securities that give investors a way to make bets on stocks’ future moves. They can be used to speculate, or to “hedge” a portfolio of stocks.
Options can be about buying time. If you’re convinced a stock will go up, or down, in a certain period, an option can be a low-cost way to profit from that move.
Options give the buyer the right, but not the obligation, to buy or sell stocks at specified prices (the “strike” price) by a specified date. There are two main types of options: calls and puts. Buying a call option gives you the right to buy a set number of shares at a set price within a certain period. For this right, you pay a price premium. It’s the same with puts, except with them, you buy the right to sell shares at a set price--for example, to protect the paper gains you may already have on specific stocks you own.
Each put or call option contract covers 100 shares. The strike prices and expirations of available contracts vary for each of the hundreds of stocks covered by options. The contracts, which trade on major options exchanges such as the Pacific Exchange and the Chicago Board Options Exchange, can easily be traded via most full-service, discount or Internet brokerages.
Individual option prices are set in the market, and fluctuate daily, as investors weigh the strike prices involved, the market prices of the underlying stocks, and the time to expiration of the option.
Options strategies can be high-risk or low-risk, depending on the investor’s aggressiveness. Options also can be used to bet on stock market indexes, commodities and other things.
Resources for options traders include:
Web sites: Chicago Board Options Exchange, https://www.cboe.com; Pacific Exchange, https://www.pacificex.com; Philadelphia Stock Exchange, https://www.phlx.com; American Stock Exchange, https://www.amex.com.
Books: “Getting Started in Options,” by Michael Thomsett (John Wiley & Sons, $18.95); “The Conservative Investor’s Guide to Trading Options,” by LeRoy Gross (John Wiley & Sons, $34.95); “The Option Advisor: Wealth-Building Techniques Using Equity and Index Options” by Bernie Schaeffer (John Wiley & Sons, $59.95).
