The key is that options give you the right to buy or sell an underlying security or asset, without being obligated to do so, as long as you follow the rules of the options contract.The key differences between options and stocks are. A derivative is a financial instrument that gets its value not from its own intrinsic value but rather from the value of the underlying security and time. In other words, while you can hold the stock of an active company for years, an option will expire, worthless, at some point in the future.
Many traders think of a position in stock options as a stock substitute that has a higher leverage and less required capital. However, options have different characteristics than stocks, and there difference between options trading and stock trading prices a lot of terminology beginning option traders must learn.SEE: Options BasicsOptions 101Two types of options are calls and puts.
When you buy a call option, you have the right but not the obligation to purchase a stock at the strike price any time before the option expires. Not only do the prices of the latter fluctuate more, but investing in individual stocks means decoupling oneself from the collective wisdom and movements of the market. Never miss a trending story with yahoo.comas your homepage. Every new tab displays beautiful Flickr photos and your most recently visited sites.
There are many important differences between listed options based on an underlying stock, and options on a futures contract. With a stock, the option is tied to 100 shares of stock and is a derivative of those shares. A futures option, however, is a type of derivative on a derivative.