What are derivatives and options?
Options are known as “derivative” investment instruments because their value derives from the security on which they are based. Options are a useful tool for enhancing a portfolios income and in many cases reducing risk. Other type of derivatives are futures contracts or swap agreements which are generally only appropriate for the most sophisticated investors. Stock options are contracts giving the purchaser the right to buy or sellat a specific price and within a certain period of time100 shares of corporate stock (known as the underlying security). These options are traded on a number of stock exchanges and on the Chicago Board Options Exchange. When investors buy an option contract, they pay a premiumthe price of the option as well as a commission on the trade. If they buy a “call” option, they are speculating that the price of the underlying security will rise before the option period expires. If they buy a “put” option, they are speculating that the price will fall. Tip:While opti
A. Options are known as “derivative” investment instruments because their value derives from the security on which they are based. Options are a useful tool for enhancing a portfolio s income and in many cases reducing risk. Other type of derivatives are futures contracts or swap agreements which are generally only appropriate for the most sophisticated investors. Stock options are contracts giving the purchaser the right to buy or sell at a specific price and within a certain period of time 100 shares of corporate stock (known as the underlying security). These options are traded on a number of stock exchanges and on the Chicago Board Options Exchange. When investors buy an option contract, they pay a premium the price of the option as well as a commission on the trade. If they buy a “call” option, they are speculating that the price of the underlying security will rise before the option period expires. If they buy a “put” option, they are speculating that the price will fall.
