Options

• Options allow investors to arrange for a potential transaction in the future. They list a specific price that the security can be traded at regardless of market value, a precise number of securities held under the option, and a strict time frame when the option can be used. The investor must pay a premium to purchase the option, and if the investor does not use it within the time frame it becomes worthless. This requires careful study and speculation on the condition of the security market.
  
  

Differences Between Stock and Bond Options

• Investors create options for both stocks and bonds, but there is no difference in how the options function. They give the investors the same abilities, only one affects the trading of shares and the other bond trading. The premium charged for the option will change based on the profitability of the stock or the bond. For stocks, dividend payments and company growth will be taken into account, while with bonds the focus will be more on the interest rate and the term of the bond.
  
  

Call

• Call options allow an investor to buy a specific stock or bond. The number of shares or bond certificates is limited, but the price is also frozen for the applicable shares and bonds. This means that if the market value of the stocks or bonds rises, the investors can buy at a discount using the call option. Stock value tends to rise more sharply than bond value, so call options are more useful when dealing with stock, but if a particular series of bond prices are also rising investors can also make a profit buying a call option for them.
  
  

Put

• Put options allow investors to sell stocks or bonds at a specific price. In a parallel to call options, investors can make money with a put option if they sell stock or bonds at a higher price than the market current supports, within the time frame specified. Companies sometimes use put options to control how they sell specific bonds.