Recommended
Options for the Stock Investor
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The
Benefits of Options
Now
that we have reviewed the options basics let's dig a little
deeper. How are
stocks and options different and what are the benefits of using
options as an investment vehicle?
To
be blunt, options give investors options. Part of the reason this
is true is that options share many similarities with common
stocks. Like common stocks, options are listed and traded on various exchanges. Currently option contracts are traded on the American Stock
Exchange, Inc. (AMEX), the Chicago Board Options Exchange, Inc. (CBOE),
the Pacific Exchange, Inc. (PCX), and the Philadelphia Stock
Exchange, Inc. (PHLX). These exchanges ensure orderly and liquid markets.
Of
course options do differ from common stocks. First, options have a
limited life span and are often referred to as wasting assets. Options provide the buyer with the right, but not the
obligation to buy or sell a specific security at a pre-determined
price for a fixed period of time. Once that time has expired the option ceases to
exist and
becomes worthless. Second,
because options have limited life span option buyers do not
receive the common stock voting rights or dividends. Third, options have no collateral value; they cannot be
used for margin purposes at brokerage firms.
exercising an option
leverage
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