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Introduction

You may have heard of options and seen that you can trade them in your online account, but what is a stock option and why would you even care if one exists? 

Let's start first with a very basic question: What is a stock option? 

A stock option is not a physical thing like holding shares in a company. Instead it is a contract between two parties. 

When you own stock (or shares) you actually own part of a physical entity--a piece of a company. An option is an agreement, or contract, where one party agrees to deliver something to another party within a specific time period and for a specific price. 

This distinction is important because with options you are not borrowing anything. For example, in the case of stock, you must first borrow the stock to short it--but with options there is nothing to borrow so you can short options without the worry of borrowing first. 

Options are popular because they can help you get more bang for your buck. Instead of buying a stock outright, you can enter into an options contract which can be much cheaper but have the same--or even better--results. 

Options can also be less risky than holding stocks, but that is not always the case. If you plan on trading options at some point make sure you understand fully the risk and downside of each trade. Also, options take more attention and can amplify the movement of a stock in your favor or out of your favor very quickly. So options trading is not for everyone, especially if you are not comfortable taking on risk or managing positions. 

Learning about options isn't difficult anymore. There are a few web sites that have popped up recently to help you keep track of options news. And there have been plenty of books written recently that can really help individual investors understand how using options can be a worthwhile endeavor, depending on your financial needs. 

Many of the various options exchanges have web sites geared towards individual investors looking for information on options. 

Probably the best prepared to reach investors is the Chicago Board Options Exchange, which has a terrific web site set up to educate you. Visit its education page. The CBOE also holds seminars and sells books about options and how to trade them. 

Your broker also can give you much guidance if you are prepared to trade options online or through a proprietary service.

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These discussions are for educational purposes only and are not intended to be investment advice. If you would like to send your comments, please email us.