Equity options today are hailed as one of the most successful financial products to be introduced in modern times. Options have proven to be superior and prudent investment tools offering you, the investor, flexibility, diversification and control in protecting your portfolio or in generating additional investment income. We hope you’ll find this to be a helpful guide for learning how to trade options.

Understanding Options

Options are financial instruments that can be used effectively under almost every market condition and for almost every investment goal. Among a few of the many ways, options can help you:

• Protect your investments against a decline in market prices
• Increase your income on current or new investments
• Buy an equity at a lower price
• Benefit from an equity price’s rise or fall without owning the equity or selling it outright.

Benefits of Trading Options:

Orderly, Efficient and Liquid Markets

Standardized option contracts allow for orderly, efficient and liquid option markets.

Flexibility

Options are an extremely versatile investment tool. Because of their unique risk/reward structure, options can be used in many combinations with other option contracts and/or other financial instruments to seek profits or protection.

Leverage

An equity option allows investors to fix the price for a specific period of time at which an investor can purchase or sell 100 shares of an equity for a premium (price), which is only a percentage of what one would pay to own the equity outright. This allows option investors to leverage their investment power while increasing their potential reward from an equity’s price movements.

Limited Risk for Buyer

Unlike other investments where the risks may have no boundaries, options trading offers a defined risk to buyers. An option buyer absolutely cannot lose more than the price of the option, the premium. Because the right to buy or sell the underlying security at a specific price expires on a given date, the option will expire worthless if the conditions for profitable exercise or sale of the option contract are not met by the expiration date. An uncovered option seller (sometimes referred to as the uncovered writer of an option), on the other hand, may face unlimited risk.

This options trading guide provides an overview of characteristics of equity options and how these investments work in the following segments: