Options are a very powerful tool that traders use to hedge their risk. Discover your stock options are and how they work!

An option gives its owner the right (but not obligation) to buy or sell a stock at a specific price on a specified date in the future. The value of an option depends on the difference between the current market price of the underlying security and the strike price of the option.

What Are Options?

Options give investors the opportunity to profit when the price of a stock moves in one direction or another. They allow investors to speculate on whether a stock will rise or fall without actually buying the shares themselves.

The Basics of Options Trading

A call option gives its owner the right (but not obligation) to buy 100 shares of a particular stock at a certain price within a specified period of time. If the stock rises above the strike price during the option's life, the holder of the option gets to exercise his right to purchase the shares at the higher price. In other words, he makes money if the stock goes up. On the other hand, if the stock falls below the strike price, the option expires worthless.

Hedging with Options

Hedging is the practice of offsetting one investment against another so as to reduce risk. This is done through the use of derivatives such as options.