One of the
riskiest investment strategies in the financial world involves selling stock
short. This involves borrowing stock from your broker and selling it. If the
stock's market price drops, you can buy it back at the lower price, pay back
your broker and pocket the difference. Problems arise if the stock price
doesn't co-operate and instead skyrockets. You can hedge your position by
buying protective call options.
Call
Options
A call option gives
the option holder the right, but not the obligation, to purchase the underlying
security at a fixed price, called the strike price, for a set period. If the
option isn't exercised before it reaches its expiration date, it becomes
worthless and ceases to exist. Call options are traded on major investment
exchanges in much the same way that stocks are traded. While owning a call
option doesn't give you ownership of the underlying stock, it does give you
control over that stock for as long as the option is in force.
