Q: My broker offers stocks and options, but I have no clue how options investing works. What is this all about and should I invest in options?
The basic idea behind options is quite simple. There are two main types of options: call options and put options.
Call options give you the right, but not the obligation, to buy a stock at a predetermined price, known as the strike price, at any point before a specified expiration date. Put options give you the right, but not the obligation, to sell a stock at a certain price before a specified date.
Options contracts are typically sold in increments of 100 shares, although there are exceptions.
As an example, as I'm writing this, I can buy a call option on Apple with a strike price of $250 and expiration date of Jan. 17, 2020, for about $2.60. This means that I'd pay $260 for the right to buy 100 shares of Apple at $250 each anytime before that date.
Unfortunately, that's where the simplicity ends. There are some easy-to-understand options strategies investors can use. Selling covered calls is a good example -- this involves selling call options against stocks that you own, which can generate additional income in your portfolio and help limit your downside risk. Other options strategies can be extremely complex and risky and are best left to professionals and highly experienced investors.
The bottom line is that while options can be a great tool for investors when used properly, it's important to learn all you can and know exactly what you're getting into before you decide to make options a part of your own investment strategy.