What are OPTIONS and how can I take advantage of them?

The word “options” is becoming more a typical term mentioned for the everyday investors, but how options actually work are still widely misunderstood by many.

Stock options are considered a contract that allows the buyer to buy or sell an underlying stock at a predetermined / fixed value. This however is only an option to do so, and there is no obligation whatsoever. The other aspect of an option is a time value. If the buyer does not take the opportunity to do anything with their option, at the end of the options life, it simply will expire worthless.

Options can be broken down into two distinct types:

Call options (locking in your buy price) – The value of a call option will increase in value as the stock climbs. If you own a call option, you are given the right to buy a certain stock at a preset price within the timeframe of the option.

Put options (locking in your stock sell price) – the value of a put option will increase as the stock falls. If you own a put option, you are given the right to sell your stock at a preset price within the timeframe of the option. This is therefore used as an insurance value for your stock.

If you do decide to buy options, you need to identify why you are doing so. Is it because you think a stock might skyrocket shortly, so you buy a call and lock in a buy price? Or do you own stock and are concerned about the stock falling overnight? Or are you simply trading the value of the option?