Option Terminology

Understanding Option Terminology

If you are contemplating investing in options or using options as a part of your investment strategy, it is critical that you fully and completely understand what they are and the critical terms associated therewith. One of the things that I have experienced, more than once in my 30-plus years of representing investors, is that investment classes recycle themselves. For example, let’s assume that the current “hot” investment class is limited partnerships, then stock trading becomes in vogue, then trading stocks on margin, then option trading and then the circle is completed with limited partnerships returning to the forefront. Obviously, there are many other types of investment classes that exist but you get the idea. Also, remember that trading in options involves substantial risks and is not appropriate for everyone.

Because option trading carries its own unique risks, brokerage firms must deliver to investors, before the first option trade, a booklet prepared by the Options Clearing Corporation called Characteristics and Risks of Standardized Options. Just to demonstrate how complicated option trading is, the current version of this booklet is 148 pages of single-spaced text.

An overview of options terminology can be found on this page of the U.S. Securities and Exchange Commission website.

Remember, this information is provided for educational purposes only and should not be relied upon as investment advice. To speak with an experienced attorney about investment options, you can reach my Boca Raton law offices online or by telephone at 561-406-4644.