Options - General Comments

Florida Securities Fraud and Investment Mismanagement Attorney, Russell L. Forkey

Options - Are They Suitable Investments for You?

If you are contemplating investing in options or using options as a part of your investment strategy, it is critical that you fully and completely understand what they are and the critical terms associated therewith. One of the things that I have experienced, more than once in my 30 plus years of representing investors, is that investment classes recycle themselves. For example, let's assume that the current "hot" investment class is limited partnerships, then stock trading becomes in vogue, then trading stocks on margin, then option trading and then the circle is completed with limited partnerships returning to the forefront. Obviously, there are many other types of investment classes that exist but you get the idea. Also, remember that trading in options involves substantial risks and is not appropriate for everyone

Because option trading carries its own unique risks, brokerage firms must deliver to investors, before the first option trade, a booklet prepared by the Options Clearing Corporation called Characteristics and Risks of Standardized Options. Just to demonstrate how complicated option trading is, the current version of this booklet is 148 pages of single spaced text. The topics contained in the booklet are:

•· Option Nomenclature

•· Options of Equity Securities

•· Index Options

•· Debt Options

•· Foreign Currency Options

•· Flexibility Structure Options

•· Exercise and Settlement

•·Tax Considerations, Transaction Costs, and Margin Requirements

•· Principal Risks of Options Positions

In the option abuse cases that I have handled over the years, I use this booklet to cross-examine the account executive to test his understanding as to how the options that he was recommending to the client worked and what was the risk associated with the option or strategy that the broker was employing. More likely than not the account executive did not know what he or she was doing. What was particularly disturbing is that I cannot remember one account executive that really understood how to compute margin requirements for any option strategy that was being employed because it differs from the normal method of calculation in equity accounts.

With the above said, an option is a contract to buy or sell a specific financial product. For example, if you are dealing in equity options, the underlying instrument is a stock, exchange-traded fund or similar instrument. The option contract is like any other contract. It contains specific terms concerning what you are buying or selling. The contract contains a specific price at which it can be exercised and a date of which it expires, much like an option contract to purchase a parcel of land. As with all option contracts when it expires, it no longer has any value. The exercise price is called the "strike" price.

There are two types of options, "puts" and "calls" and you can either buy or sell each. They can be covered or naked. I am not going to go into any more detail about options or options trading because there are so many variables that can come into play. Suffice it to say that if you have lost money as a result of broker fraud, misconduct or negligence, you need to retain an experienced attorney to represent you in these types of matters.

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