Understanding the Options Market:
Fundamentals of Trading Options on Stocks, Indices and Futures 

Description:

The hundreds of different exchange-traded options contracts now available to investors— whether on individual securities, stock indexes or futures contracts—can seem intimidating, even to an experienced hand at trading stocks, bonds or futures. There is virtually no limit to the ways options can be used, and their growing popularity as investment vehicles reflect the flexibility they offer large and small investors alike.

The purpose of this booklet is to show investors who are new to options some of the ways options are used, and to help them determine which options strategies, if any, are appropriate for them. It can provide no more than an introduction to this complex product, and it assumes a familiarity with the financial instruments underlying the options contracts. Used appropriately, options can help the investor limit risk, lock in profits, and sleep at night. Or they can be used to increase leverage, enhancing the potential profit while increasing the potential financial risk. Like any tool, they must be used carefully with full regard for that risk. An investment that is appropriate for one investor could involve unacceptable risks for another. In other words, the investor himself must determine which tool to use, which market to use it in, or whether to stand aside.

Fortunately for us, the many different kinds of options share a common vocabulary and a common set of responses to similar changes in their underlying investments. That vocabulary may seem difficult at first, but there is nothing secret or mysterious in it. We will now explore what those words mean and how to use options. Because so many unfamiliar terms will be used, a glossary is included in this booklet beginning on page 38.