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You may think options investing isn’t for beginners, but many investors use it to protect their stock investments. So let’s take a look at how it works.
An option is a contract. It gives you the right—but not the obligation—to buy or sell an asset at a specific price before a certain date.
I know that sounds confusing, so let’s look at an example.
Let’s say you own 100 shares of a company called Lemon Car Dealers, which you bought at $100 a share, and is still trading at $100 a share.
For some reason, you think the stock might decline in value, and you want to protect yourself. After all, if the company goes out of business, you’d be out 100 shares at $100 each, which is a total of $10,000.
So, you buy an options contract for $1,000. This particular contract lets you sell 100 shares of Lemon Car Dealers for $80 a share.
Two things could happen.
First, as you suspected, Lemon Car Dealers could go out of ...
