Getting Started in Options
Since there are so many available options – and so many ways to trade them – you might not know where to begin. But getting started is easier than you think, once you determine your goals.
What is an Option?
An option is a contract to buy or sell a specific financial product officially 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 establishes a specific price, called the strike price, at which the contract may be exercised, or acted on. And it has an expiration date. When an option expires, it no longer has value and no longer exists.
Benefits & Risks
Most strategies that options investors use have limited risk but also limited profit potential. For this reason, options strategies are not get-rich-quick schemes. Transactions generally require less capital than equivalent stock transactions, and therefore return smaller dollar figures – but a potentially greater percentage of the investment – than equivalent stock transactions.
Though their predictive value has limits, the key components of theoretical option pricing still offer an excellent tool for helping investors anticipate price movements and explain price relationships between options.
When considering any options strategy, you may want to think about Long-Term Equity AnticiPation Securities® (LEAPS®) if you are 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 an attractive feature for many investors. In addition, there are several other factors that make LEAPS® useful in many situations.