eful, advantageous tool for meeting a variety of investment goals.
Some investors are attracted to options because of the absolute risk (Hert, 1986). Others use them to increase the income derived from their stock holdings, either by complementing long positions with 'calls' or by writing options on their stocks. Others use stock options as a means of establishing their purchase price for stocks up to nine months in advance -- the 'strike' or 'exercise' price -- which is the price at which one may buy or sell a given security. Some find it useful to diversify their investments with a small capital outlay. Others use options to protect their long stock positions, perhaps by using 'puts' as a hedge against a decline in their stock's price.
The basic concept of an option has been around for a long time, and the essential components of a stock option are the same as most other options -- such as an option to buy or sell a house. A stock option includes a description of the security the option buyer may purchase or sell, the price for which it is to be bought or sold (called the 'strike' price), the price the investor must pay for this privilege (called the 'premium'), and a specified time in which the stock must be bought or sold (The Wall Street Journal: Education Edition, 1984). The premium is what the buyer pays the seller for the rights of the contract. The s
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