An option is a contract that allows you to buy or sell a certain amount of an underlying stock (usually 100 shares) at a specific price for a set amount of time.
Options can provide three general benefits:
Limit Risk
Options can limit your risk of loss. When you buy an option, your potential loss is limited to the amount that you have invested in the option, which is substantially lower than buying shares of the stock or selling them short (which has unlimited risk). With less money invested, you therefore limit your exposure to market swings, which can be an invaluable strategy in a choppy market like we saw in 2004 or during a prolonged down period such as 2000-2002.
Provide Leverage
Options provide investors with ample amounts of leverage. A small move in the underlying stock can create a big gain on an option.
Profit in Any Market
Options can provide gains in both bull and bear markets.
Options Trading Tutorial
Options Terminology
Cabot Options Trader
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