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Options and the Investor
Most people know that an option is a choice. It is a choice to buy that new compact disc, a choice to upgrade to leather on a new car, or a choice to speculate in the market. Options are a way to reduce risk associated with trading stocks and are quite advantageous in a capitalist society. An option is a "contract between two parties to purchase or sell a commodity futures contract at a predetermined price within a specific time period. Every option transaction has an option buyer and an option seller (4, p. 236)." The advent of organized options trading by the Chicago Board Options Exchange created a new way to play the market. Options can be used to hedge risk and to take profits larger than would be possible by buying and selling stock. This result can be accomplished using a variety of combinations to be discussed later in this paper. These strategies can be useful as pertaining to the options trader who wants to make the most profit with the least amount of risk. Elementary pricing of options will help the reader in understanding some of the differences in premiums and why the differences are so large. The Chicago Board Options Exchange has changed the way that options are traded through advances in technology to the point that options are bought and sold instantaneously with almost a 100% guarantee of credibility. This is one of the main reasons for the options explosion.
Options
Basic options have existed for eons and have been used as investment strategies for thousands of years. The concept was definitely used by societies other than ours, as illustrated by this excerpt from Aristo ...