Stock options offer the prospect of high gains with relatively small up-front investments that represent limited losses.

Question

Quizplus · Accepted Answer

A stock option grants the holder the right to buy (call option) or sell (put option) shares of the stock at a fixed price (strike price) at some time in the future. The investment to be made immediately is small, whereas the investment to be made in the future is generally larger. An option to buy a rapidly rising stock currently priced at 50 USD might cost as little as 0.50 USD. Owners of such a stock option have limited their losses to 0.50 USD per share, while the upside potential is unlimited. This aspect of options is attractive, because options offer the prospect of high gains with relatively small up-front investments that represent limited losses.

Stock Options Offer the Prospect of High Gains with Relatively