Options Information

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.

Protect Against a Drop in Price

Purchasing a put against stock is similar to purchasing insurance. The investor will pay a premium (the cost of the put) to insure against a loss in the stock position. No matter what happens to the price of the stock, the put owner can sell it at the strike price at any time prior to expiration.

Prepare to Buy a Stock at a Lower Price

Selling a cash-secured put involves selling a put and depositing the money for the purchase of stock at the brokerage firm (generally, this money is invested in short-term instruments).

Position Yourself for a Big Market Move

A variation combining the buy call and buy put strategies (discussed in the previous two examples) is called a "straddle" - it involves holding both a long call and a long put position with the same strike price and time to expiration.

Benefit from a Stock Price Rise Without Buying the Stock

The owner of a call has the opportunity to profit from a rise in the stock with very little capital at stake compared to the amount necessary to buy the underlying security. The most that a call owner can lose is the amount paid for the option, yet he has unlimited profit potential as the stock rises above the strike price.

Join over 170,000 Lessons from the Pros readers. Get new articles delivered to your inbox weekly.

Free Class