Getting Started in Options
There are so many available options and so many ways to trade them that you might not know where to begin. Getting started is easier than you think.
What is an Option?
An option is a contract to buy or sell a specific financial product. This product is known as the option's underlying instrument or underlying interest. For equity options, the underlying instrument is a stock, exchange traded fund (ETF) or similar product.
The contract itself is very precise. It sets a price, called the strike price, at which the contract may be exercised, or acted on. In addition, it has an expiration date. When an option expires, it no longer has value and no longer exists.
Benefits & Risks
Most strategies used by options investors have limited risk but also limited profit potential. Options strategies are not get-rich-quick schemes. Transactions generally require less capital than equivalent stock transactions. They may return smaller dollar figures, but a potentially greater percentage of the investment than equivalent stock transactions.
The key components of theoretical option pricing help investors anticipate price movements and understand price relationships between options. However, this predictive value has limits.
When considering any options strategy, think about Long-Term Equity AnticiPation Securities® (LEAPS®). You must be prepared to carry the position for a longer term. While using LEAPS® does not ensure success, having a longer amount of time for your position to work is often an attractive feature. There are several other factors that make LEAPS® useful.
Source: The Options Industry Council www.optionseducation.org