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What are the basics of options?

What are the basics of options?

Options are contracts used by investors to take a speculative position – or a hedge – based on expected future price movements of the underlying securities.

Many investors are scared when they heard the word "option" and perceive it as a risky, speculative investment. Options certainly can be risky, but they don’t have to be. In fact, certain options strategies are far more conservative than many available investments in the marketplace.

They can be used alongside other assets in a portfolio, possibly providing hedges against specific risks, or they can be used on their own, creating elaborate strategies with various combinations of options positions. They can be used as a conservative instrument to protect profits and add income, making the overall portfolio less volatile.

On the other hand, the aggressive use of options can be extremely dangerous and result in potentially infinite losses. Options themselves can either be Calls or Puts, but these can be used to take a variety of positions since they can be written, short-sold, bought and held long, or sold outright, and all of these transactions can be used to “open” or “close” a position.

Options positions attempt to profit from an opinion the investor holds about where the price of an underlying security will move by the expiration date of the contract. An option contract exists between two investors, where one is paid a premium for the right to hold the contract, and one party has the right to buy or sell the underlying security at a specific price, called the strike price, and the other is obligated to buy or sell it at that price when and if the other exercises his or her rights in the contract.

Options prices are updated constantly and are available online. The price of options contracts available on a given security is detailed in an option chain. In this section, we hope to give you a working knowledge of options and some common strategies.

Keywords: long position, strike price, short position, calls, puts, options, open interest, open position, closed position, option chain,