While the numbers, themselves, show an incredible range of volatility, perhaps, the best illustration is provided by the graph below. One can clearly see the tremendous peaks and valleys that have occurred with accelerating instances over a very short period of time. Due to the tsunami like proportions of these weekly swings, many investors have either been sunk by the market s tide, or are fixating on their long-term investment horizon and hoping to ride it out. However, there could be a silver lining to these tumultuous swings-options. While options are very complex trading instruments, the following is a basic explanation of their function.
Options are a trading derivative based upon an underlying security or index.
There are two types of options, puts and calls . A put option gives the purchaser the right to put their stock onto the seller of the option, should the underlying stock fall to a certain level, or strike price , in a stated time period. On the other hand, a call option, provides the buyer the right to call the option seller s stock away from him should the stock appreciate to a certain level in the stated time period, or expiration date . Each option contract is good for 100 shares of the underlying stock. There are two ways that options could be effectively employed under the market conditions described above.