NAVTEQ Investor Resource Options
Do you want to hedge for yourself, rather than pay a fund manager to do it for you. A good way to do that is with options. Options give you the right to buy or sell stock or financial indexes at a set price during a specified time period.
A call option gives you the right to buy; a put option gives you the right to sell. You pay a premium for the right to buy or sell the underlying instrument at some time in the future at a specific price, which is called the strike price. If you are wrong, all you lose is the price of the option. Note: When you use options, you are making a bet on the direction of the stock or index, and also on the timing of the move.
Here is an example how a put option on a stock might work. Suppose NVT Co. is trading at $25 a share and you think the market will sell off. You buy put options, or the right to sell 100 shares of NVT at $22.50 a share. Perhaps you pay $2.50 a share or $250 for the option. If NVT stays at $25 or goes up, you lose your $250. If it
falls to $22.50, your option is now worth $5 a share (the $2.50 you paid plus the $2.50 difference between the stock price and the strike price of the option.)
You could buy “puts” on NVT Co. if you own the stock as a sort of insurance policy. This is called a "covered option," because you own the underlying security. "Covered options are a way to establish a position to protect your downside in case the market drops." You could also buy puts on a broad index, like the S&P 500, which would be a way of betting against the entire market of big-cap stocks.
Options trading has taken off over the past decade and there are hundreds of options available in today's market.