RISKS OF BUYING AND SELLING OPTIONS

Depending on how options are used, investors can be subject to substantial risks. Losing the entire amount spent to purchase a call option or a put option is not an unusual event. Investors who write options are subject to the possibility of losing substantially more than the premium received. Option prices are volatile to the point that their relative values change by a multiple of the change in the underlying stock. Thus, anything that can bring about a change in the price of the underlying stock in a short period of time has the potential for producing great loses for the owner of a stock option. On the other hand, purchasing-power risk is of no great concern to an investor in options, because put and call options typically expire in a matter of a few months. If a option position is established in combination with another investment that is purchased or is already owned, the result may be that an investor’s uncertainty is reduced.