Understanding Stock Options

Understanding Stock Options

Introduction............................................................................................................ 2 Benefits Of Exchange-Traded Options................................................................... 4 Options Compared To Common Stocks................................................................. 6 What Is An Option ................................................................................................. 7 Basic Strategies .................................................................................................... 12 Conclusion............................................................................................................ 20 Glossary...............................................................................................................22

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Introduction

Options are financial instruments that can provide you, the individual investor, with the flexibility you need in almost any investment situation you might encounter. Options give you options. You're not just limited to buying, selling or staying out of the market. With options, you can tailor your position to your own situation and stock market outlook. Consider the following potential benefits of options:

• • • • • You can protect stock holdings from a decline in market price You can increase income against current stock holdings You can prepare to buy stock at a lower price You can position yourself for a big market move even when you don't know which way prices will move You can benefit from a stock price's rise or fall without incurring the cost of buying or selling the stock outright

A stock option is a contract which conveys to its holder the right, but not the obligation, to buy or sell shares of the underlying security at a specified price on or before a...