Options

Options are essentially contracts between two parties that give you the right to buy or sell an underlying asset at a certain price within a specific amount of time.

An option's value is tied to the underlying asset, which could be stocks, bonds, currency, interest rates, market indices, exchange-traded funds (ETFs) or futures contracts. Options are securities themselves, like a stock or bond, and because they derive their value from something else, they're called derivatives.

There are two main types of options contracts: calls and puts. Owning a call gives you the right to buy the underlying asset; owning a put gives you the right to sell that underlying asset. An easy way to keep them straight is to remember that a call would "call" an asset away, while a put would "put" it to someone else.

Options can support a variety of profit and risk-minimization strategies. In the case of stocks, for instance, options can help you:

• Protect stock holdings from a decline in market price
• Generate income from your existing portfolio
• Acquire stock at a price below the current price
• Profit from a stock price's rise or fall

You can purchase call options and put options, write covered calls and, with special exception, write naked puts. Additional spread strategies are not allowed.