The facts about … Stock options

Article Excerpt

Many aggressive investors find the lure of stock options hard to resist. However, despite that appeal, the vast majority of investors lose money with options. Call options give the holder, or buyer, the right to purchase the underlying security at a specified “strike” price up until a specified expiration date. Put options, on the other hand, grant the holder the right to sell the underlying security at the strike price before a fixed expiry date. Here’s why you should avoid stock options: High costs: You pay a commission when you buy or sell options. Commissions take a large part of any profits you make, especially if you trade in small quantities. Limited room for error: Unlike common stocks, an option has a limited life. Common stock can be held indefinitely in the hope that its value may increase. Risk of total loss: Stocks can, and some do, become worthless. But option holders run a higher risk of losing the entire amount paid for the option in a relatively…