Understading options: What are options?



Options may look far too complex to many casual investors, but the idea is basically straightforward, it is a contract or agreement. Options are written agreements or contracts that allows the buyer of the option to acquire a particular security at an agreed price within a limited time period. The buyer of the options contract has the right to buy or sell the security at any time before the contract expires. The good part about this is that the buyer does not have to purchase or in standard terms, the buyer is not obligated to buy it. The holder of the option can just walk away if the price does not meet expectations. In terms of risk, the amount of loss is limited to the price the investor paid for the option.

The options market is totally separate from the stock market, but the price of each options contract is dependent on the underlying stock that it is based on. The markets are separate but they are closely corelated like an object and a shadow. If a stock on which an option is based on goes up in price, the price for the option contract goes up as well. When the underlying stock goes down, the option goes down in value as well. As the name implies, it offers investors more strategies in maximizing potential gains or generate extra income.





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