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A highly successful financial product
nowadays, stock options offer the investor flexibility,
diversification and control to protect his/her stock portfolio or
generate more investment income. Options are advantageous because
they can be used under almost every market condition and for almost
every investment objective. Options also help the investor to
purchase stock at a lower price and to benefit from a stock prices
rise or fall without owing the stock or selling it outright.
As options have a unique risk/reward structure, they can be used in
combination with other option contracts and/or other financial tools
to seek profits or protection.
Using stock options,
investors can fix the price for a specific period of time, at which
an investor can buy or dispose of 100 shares of stock for a premium
that is only a percentage of what one would pay to own the stock
outright. This helps investors to leverage their investment power
while increasing their potential reward from a stock's price
fluctuations.
As far as stock options are concerned,
there are only limited risks for buyers. In no way can an option
buyer lose more than the price of the option, the premium. With the
right to purchase or sell the underlying security at a specific
price expiring on a given date, the option will expire worthless if
the conditions for profitable exercise or sale of the contract are
not met by the expiry date.
Even as options offer many
investment benefits, they are not meant for everyone. Just as ones
returns can be large, so too can the losses ?leverage. Moreover, the
means for realizing the potential for financial success in option
trading may be difficult to create or identify. A large amount of
information must be processed before an informed trading decision
can be arrived at. Option trading is more complicated than stock
trading because traders must choose from many variables besides the
direction they believe the market will move. Careful consideration
and sound money management techniques are a must for successful
option trading.
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