Like bonds and exchange-traded funds, private investors in the US trade options much more actively than is the case in the UK.
With a dollar dealing account you will be able to deal in options in a wide range of US listed shares, as well as those on major market indices.
Options are a specialised part of the investment scene. Buying an option gives you the right, but not the obligation, to deal in a particular share at a fixed price for a predetermined period of time. An option to buy shares is a known as a call option. An option to sell is called a put option.
The price of an individual option moves by reference to several factors:
Options tend to decrease in value, other things being equal, the closer they get to expiry, because the chances of a trade being profitable diminish. Similarly the more volatile the underlying stock or index, the higher the price of the option will be, other things being equal.
An option holder cannot lose more than the amount invested in the option.
One of the most common use of options is for speculation. The fact that there are options to buy and options to sell means that, as an option buyer, you can speculate on either upward or downward movements in the underlying shares occurring before the option expires. The small outlay involved in the price of many options means that the potential gain for any given movement in the price of the underlying in the right direction is magnified.
Options, especially put options on market indices, can be used for hedging or insurance purposes. You can use them to protect the value of a long-term portfolio in a falling market. They will increase in value if the market falls, providing an offsetting profit to compensate for any losses in the underlying portfolio.
Option trading is a specialised topic, and would-be investors should read up on it before dealing. Option terminology is universal: lessons learnt in the UK options market can be applied with equal validity in the US options market, and vice versa.
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