Put and Call Options
Put and call options are securities just like stocks or bonds. When recommending options, stockbrokers have a fiduciary duty to only recommend trades that are suitable based on their customer’s financial situation and needs. The primary benefit of trading options is the ability to manage risk. Options can be used to insure or “hedge” a portfolio from a decline. Options can also be used to generate income and as a way to buy or sell stock at a more favorable price. Options trading can also be used to speculate on the upward or downward movement of stocks. However, due to the increased risks involved, options trading is not suitable for all investors.
The securities industry requires brokers to diligently supervise all options trading activity in their customer’s accounts. Most firms carefully limit the ability of inexperienced investors to trade options. Customers, however, may run into trouble when an aggressive stockbroker leads them into assuming more risk than they can either tolerate or afford. Options trading can involve very complex and sophisticated strategies and investors who do not understand or appreciate the risks involved should avoid them. A complexity not well understood is, in itself, a risk factor.