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Q&A - Options

Q. I have been advised that a good way to buy shares is to do it with a company with options. Could you explain what options are and how I should use them? 

A. While tricky, options can play a strategic role in even a conservative investor’s portfolio but you have to understand them.

An option is a contract to buy or sell a specific stock, exchange-traded fund (ETF), or similar product.

The contract has a specific price, called the strike price, at which the contract may be exercised, or acted on in the future. It also has an expiration date after which it ceases to exist.

There are call and put options and both can be bought or sold. For example, the purchase of a call gives the owner the right, but not the obligation, to buy the underlying security at the strike price on or before the expiration date. In turn the seller of the call is required to sell the security at the strike price at the buyer's request.

Conversely, the purchase of a put gives the owner the right, but not the obligation, to sell the underlying security at the strike price on or before the expiration date. In this case the seller is required to buy the security at the strike price at the buyer's request. The type of option utilized, and whether it’s purchased or sold, depends upon what the investor hopes to achieve.

People use options to generate income, protect portfolio gains, hedge a position or to add diversity to a portfolio.

As you can see they’re not a straight forward play for the inexperienced and I recommend a lot of homework before you dabble with options trading.

Need help with your investments? Book a complimentary first appointment with Switzer Financial Services today.

 

 

 

 

Published on: Monday, September 07, 2009

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