General Question

Poser's avatar

What are stock options?

Asked by Poser (7782 points ) August 16th, 2007

I'm trying to start a more aggressive investment strategy (beyond IRA's and mutual funds). A friend mentioned stock options. I know that they are shorter term than buying stocks, and don't follow the typical "buy low, sell high" formula. But beyond that, I'm lost.

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4 Answers

ketoneus's avatar

Stock options are generally granted by your employer as part of an incentive-based pay package. The idea is that an individual is granted the option to buy a certain number of shares at a certain price, say $10 per share. Usually there is a vesting period before the options can be exercised. So, imagine you are granted 100 options at a sale price of $10 per share, with a vesting period of 1 year. If after one year, the stock is trading for $15 per share, then you can sell your options at that price and make $500 profit.

kevbo's avatar

Or, you mean optioning a stock. This is when you pay a premium which reserves your right to buy or sell a stock at a later date. Essentially, you're betting that the stock price will go up or down (you decide which when direction when you purchase the option) and then when that later date comes up either you are right and you get to sell or buy at the price the stock was six months ago (for example) or you can sell your option to someone else, giving them the benefit, or your wrong and the stock either remains unchanged or moves in the wrong direction so you let the option expire.

The Rich Dad Poor Dad (Robert Kiyosaki) covers this in more layman's terms in his multimedia offerings (richdad.com). More complexity... look at Wikipedia under options (finance)

ironhiway's avatar

Stock options offer a wide variety of investment choices from being very conservative to being very risky.

Covered calls: selling an option (Contract to buy your stock at an agreed on price) can improve the return on your investment by collecting the premiums paid for the option. The premium also acts to share some of the risk of owing a stock with the option purchaser. If the stock goes above the value of the option( the agreed upon price) the option purchaser receives the rest of the gain.

Other strategies are spreads, naked calls and puts, buying calls and puts, all with differing levels of risk and reward. You should get the free book on options trading and read it you will need to do so before being allowed to trade options by all reputable brokers. You may also need to demonstrate your ability to assume the level of risk that options present.

I have traded and purchased options with success and will continue to do so. I’m not interested in the riskiest types of option trading. Covered calls and puts are my primary focus. Also in bull markets when a reputable company announces an up coming stock split a purchase of an option 6+ months out can often return ten times the investment.

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