What Is A Stock Option?

An option is a contract to buy or sell a specific financial product officially known as the option's underlying instrument or underlying interest. For equity options, the underlying instrument is a stock, ETF, or similar product. The contract itself is very precise. It establishes a specific price, called the strike price, at which the contract may be exercised, or acted on prior to the expiration date. When an option expires, it no longer has value and no longer exists.

Options come in two varieties, CALLS and PUTS, and you can buy (hold or go long) or sell (write or go short) either type. You make those choices - whether to buy or sell and whether to choose a CALL or a PUT - based on what you desire to achieve as an options investor.

A CALL is the right to buy 100 shares of stock at a fixed price per share, any time between purchase of the call and the specified deadline in the future. The time is limited. As a long call buyer, you acquire the right to buy the stock and as a short call seller, you grant the right to someone else. A short call seller (writer) must also be willing to deliver or has the obligation to sell 100 shares at the strike price if the long call buyer (holder) exercises the option.

A PUT is the opposite of a call. It is a contract granting the right to sell 100 shares at a fixed price per share and by a specified expiration date in the future. As a long put buyer, you acquire the right to sell the stock and as a short put seller, you grant that right to someone else. A short put seller (writer) must also be willing to acquire or has the obligation to buy 100 shares at the strike price if the long put buyer (holder) exercises the option.

Long-term Equity AnticiPation Securities (LEAPS) are simply long-term options that expire at dates up to 39 months in the future, as opposed to shorter-dated options that tend to last no longer than nine (9) months.

RISKS WITH OPTIONS TRADING

Option trading is risky so your funds should be your speculative capital or money you can afford to lose. You should only use funds that you are willing and able to comfortably lose.

Investments in the securities markets, and especially in options, are speculative and involve substantial risk. You can lose your entire investment. Individual results may vary from those achieved by our financial newsletter recommendations and no actual investment positions are taken by the newsletter. Only you, with the assistance of a qualified securities professional (personal financial adviser or broker), can determine what level of risk is appropriate for you and how, when, and where you should participate in the options markets. Our recommendations should only be considered by sophisticated investors who are aware of the risks in options trading.

For detail information on options risks, see Chapter X of The Options Clearing Corporation (OCC) "CHARACTERISTICS AND RISKS OF STANDARDIZED OPTIONS" - booklet.

For more information go to http://www.stockoptionking.com/

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