Options are contracts that give the owner the right to buy or sell an asset at a fixed price, called the strike price, for a specific period of time. The “asset” may be several kinds of underlying securities.
Option trading is a way for investors to leverage assets and control some of the risks associated with playing the market. You can use options to protect gains, control large chunks of stock or cut losses with a relatively small cash outlay.
Opportunity to speculate using leverage. This allows for strong potential returns as you can control an investment with a relatively small amount of money. Just be careful with this power, as it can also result in significant loss if your outlook is incorrect.
Flexibility with unique strategies. There’s a wide variety of option strategies that can be performed on many types of underlying securities, like stocks, Indexes and ETFs. So whether your outlook is bullish, bearish or neutral, there’s a strategy that can work in your favor if your forecast is correct.
Hedging your position. If you have an existing position in an underlying security, you can use options to lock in potential gains or minimize loss should things not go as you expected.
On the other hand, option trading can be complicated and risky, and some strategies may cause you to lose your entire investment or more. To help control some of the risks and manage cost, we don’t charge a commission to close out short options that trade for less than 5 cents. What to Know Before You Decide