Options, Call Options, Put Options and Writing Options

This section focuses on options which are stocks derivative investments. A derivative security is a financial security that derives its value from another security.

Stock derivatives as options and futures are securities that offer investors some of the benefits of stocks without having to own them.

Future contracts will be discussed in the next section.

Options and how they work
An options contract gives the holder the right to buy or sell shares of a particular common stock at a predetermined price (strike price) at or before a specific date (expiration date). An option is a right not an obligation to buy or sell stocks at a specific price before or at expiration date.

The strike price is the price at which the option holder can buy or sell the stock. An option expires at its expiration date.

A stock option is a derivative security because its value depends on the underlying security which is the common stock of the company. For example, the value of an to buy or sell Intel stocks depends on the price of the stock in the market.

Another underlying securities, besides common stocks, for the options contract are stock indices, foreign currencies, US Government debt and commodities.

Options are negotiated in the Chicago Board Options Exchange (CBOE), the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX), the Philadelphia Exchange (PHLX) and the Pacific Exchange (PSE). Options can also be negotiated in the over-the-counter (OTC) market.

Understanding how options contract work can provide you with additional tools that can be successfully used in volatile markets.

Options are used to speculate with the movement of future prices of stock, and to reduce the impact of volatility of the stock prices, in some aspects the options are similar to future contracts. One of these similarities is that option holders with small investments can control a great amount of money in stocks for a limited time. The risk of loss, however, is much less for option holders than for future holders.

An options contract gives the owner the right to buy or sell a specific number (generally 100) of common shares from a company within a period of time.