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Introduction
Stock options today are hailed as one of the most successful financial products to be
introduced in modern times. Options have proven to be superior and prudent investment
tools offering you, the investor, flexibility, diversification and control in protecting
your stock portfolio or in generating additional investment income.
Options are financial instruments that can be used effectively under almost every
market condition and for almost every investment goal. Among a few of many ways, options
can help you:
- Protect your stock holdings against a decline in market prices
- Increase your income on current or new stock holdings
- Buy stock at a lower price
- Benefit from a stock price’s rise or fall without owing the stock or selling it outright.
Benefits of Trading Options:
Orderly, Efficient and Liquid Markets
Standardized option contracts provide orderly, efficient, and liquid option markets.
Flexibility
Options are an extremely versatile investment tool. Because of their unique risk/reward
structure, options can be used in many combinations with other option contracts and/or
other financial instruments to seek profits or protection.
Leverage
A stock option allows investors to fix the price, for a specific period of time, at which
an investor can purchase or sell 100 shares of stock for a premium (price) which is only a
percentage of what one would pay to own the stock outright. This allows investors to
leverage their investment power while increasing their potential reward from a stock's
price movements.
Limited Risk for Buyer
Unlike other investments where the risks may have no boundaries, options offer a defined
risk to buyers. An option buyer absolutely cannot lose more than the price of the option,
the premium. Because the right to buy or sell the underlying security at a specific price
expires on a given date, the option will expire worthless if the conditions for profitable
exercise or sale of the contract are not met by the expiration date. An uncovered option
seller (sometimes referred to as the uncovered writer of an option), on the other hand,
may face unlimited risk.
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To get an overview of characteristics of stock options and other option types and how
these investments work, click through the following segments. This introductory text was
developed to give individual investors some fundamentals of information on which to build
an understanding of this complex but effective investment alternative.
This site discusses exchange-traded options issued by The
Options Clearing Corporation. No statement on this site is to be
construed as a recommendation to purchase or sell a security, or to
provide investment advice. Options involve risks and are not suitable
for all investors. Prior to buying or selling an option, a person must
receive a copy of Characteristics and Risks of Standardized Options.
Copies of this document are available from The American Stock Exchange,
86 Trinity Place, New York, NY 10006 or The Options Clearing
Corporation, 440 S. LaSalle Street, Suite 2400, Chicago, IL 60605.
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