Understanding Option Investors: Strategies & Benefits

An option investor is an investor who trades option contracts. An option is a financial instrument derived from an underlying security, such as a stock. An option is a contract between 2 parties, the buyer or holder of the contract who has certain rights and the seller or writer of the contract who has obligations. An option holder pays a premium or buys a right to buy or sell while the option writer receives the premium in exchange for the obligation to buy or sell.

Income and Hedge Strategies
An option investor uses these contracts as a way to minimize risk or earn a profit depending on the movement of the stock market. Two basic strategies employed by option investor are income strategies and hedge strategies. An income strategy is employed by an option writer who seeks to profit by writing option contracts. An option holder wants to protect their portfolio against loss or buy stock at a lower price and sell it at a higher price than what the market permits. This is accomplished through a hedge strategy.

Using Options to Protect Investments
Having options in your stock portfolio can be a way to reduce potential losses and capture gains made on a stock. Option trading involves risks and you have to be qualified by a stock brokerage firm in order to open an option trading account.