Option use is the best when the volatility is at high levels
and the stop loss point on a particular stock is about the same
price as the cost of an option. Also time spreads are also the
highest as volatility increases the option premiums. "Call
options" is a contract giving the holder the right to buy 100
shares of the underlying stock within a certain time frame. The
concept is like leasing a car. You have the right to buy this car
at the end of the term but instead of paying the whole premium up
front like in buying options, you pay it to the financing company
by monthly installments. Your lease expires at the end of the term
and just like an option, you may exercise it, (buy the car or buy
the stock), or just let it expire, (give back the car or do
nothing on the options side.) It is that simple.
"Put options" are the opposite as it gives you the right to
sell 100 shares of the underlying stock also within a certain time
frame and at a certain price. If the stock falls below this price,
(called "strike price"), you will be guaranteed to sell at your
strike price. Obviously the shorter the time you buy for
protection, the cheaper you pay. A one month premium is less
expensive than two months and so on. Theoretically, if you want
downside protection for an infinite time period, then the premium
will equal the price of the stock.
Both these definitions are for buying puts and calls as the
buyer has the right to exercise or sell their puts at any time
prior to the options expiration, (the period one has purchased
for.) Please remember that a buyer has the right while a seller
is obligated as this is a very important distinction.\
