Stock Options
Description
This article is from the What Every Investor Should Know.
Stock Options
Options are known as "derivative" investment instruments because their value derives from the security on which they are based. Stock options are contracts giving the purchaser the right to buy or sell, at a specific price and within a certain period of time, 100 shares of corporate stock (known as the underlying security). These options are traded on a number of stock exchanges and on the Chicago Board Options Exchange.
When investors buy an option contract, they pay a premium--the price of the option as well as a commission on the trade. If they buy a "call" option, they are speculating that the price of the underlying security will rise before the option period expires. If they buy a "put" option, they are speculating that the price will fall.
While options trading can be very useful as part of an overall investment strategy, it can also be very complicated and sometimes extremely risky. If you plan to trade in options, you should make sure that you understand basic options strategy and that your registered representative is qualified in this area.
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