Stock Options Trading Information
A stock option is the right, without any obligation, either to buy or to sell a certain stock on a specified future date. An option to buy is a "call," while an option to sell is a "put."
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Significance
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The significance of trading in options, rather than in the underlying stock, is that this leverages the traders' assets. For a given amount of money, the potential gain (or loss) can be vastly increased.
The website Stock Options Explained gives as a hypothetical example XYZ company's shares, which are trading at $12. The options to buy it at that price two months from now may be trading for $3. Effectively, then, although you can only buy 100 of the shares for $1,200, you can buy the option to buy 400 shares for the same amount.
Exchanges
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The most common form of options trading involves exchange-listed stock options. A would-be trader can simply open an account with a broker dealer and begin trading. There are five stock option exchanges in the U.S. alphabetically: American Stock Exchange (AMEX); Chicago Board Of Options Exchange (CBOE); International Securities Exchange (ISE); Pacific Exchange (PCX); and Philadelphia Stock Exchange (PHLX).
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Caution
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Stock option trading can be very risky and is not recommended for the retail investor.
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