Good Words Never Die

Understanding what choices you can make as an options trader.

Options give you Options.

You can tailor your position to your own situation and stock market outlook.


At a glance
Learn why options are used.


Investors and Traders use options to:

  • Protect stock holdings from a decline in market price
  • Earn income from current stock holdings
  • Prepare to buy stock at a lower price
  • Position for a big market move even when they aren’t sure which way prices will move
  • Benefit from a stock price’s rise or fall without incurring the cost of buying or selling the stock outright

Other Benefits include:

  • Efficient, Liquid Markets
  • Flexibility
  • Leverage
  • Limited Risk
  • Guaranteed Contract Performance.

Standardized option contracts provide orderly, efficient, and liquid option markets. Except under special circumstances, stock option contracts generally cover 100 shares of the underlying stock. The strike price of an option is the specified share price at which the shares of stock will be bought or sold if the buyer of an option (the holder) exercises his/her option.

As a result of this standardization, option prices (premiums) can be obtained quickly and easily at any time during trading hours. Additionally, closing option prices for exchange-traded options are published daily in many newspapers. Option prices are set by buyers and sellers on the exchange floor, where all trading is conducted in the open, competitive manner of an auction market.

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 create either a hedged or speculative position.

Leverage
A stock option allows you to set the price, for a specific period of time, at which you can purchase or sell 100 shares of stock. To buy the right to control the stock in that way, you pay a price (the premium) which is only a percentage of what you would have to pay to own the stock outright. That leverage means that by using options you may be able to increase your potential benefit from a stock’s price movements.

Source: www.scotiabank.com/itrade/en/0,,3980,00.html

Comments are closed