The potential loss for the holder of an option is limited to the initial premium paid for the contract. The writer on the other hand has unlimited potential loss that is somewhat offset by the initial premium received for the contract. For more information go to our Options Pricing section. Investors can use put and call option contracts to take a position in a market using limited capital. The initial investment would be limited to the price of the premium.
Investors can also use put and call option contracts to actively hedge against market risk.
A put may be purchased as insurance to protect a stock holding against an unfavorable market move while the investor still maintains stock ownership. A call option on an individual stock issue may be sold, providing a limited degree of downside protection in exchange for limited upside potential. Our Strategies Section shows various options positions an investor can take and explains how options can work in different market scenarios. The Expiration day for equity options is the Saturday following the third Friday of the month. Therefore, the third Friday of the month is the last trading day for all expiring equity options.