Like all securities — including stocks, bonds,
and mutual funds — options carry no guarantees, and you
must be aware that it's possible to lose the entire principal
you invest. As an options holder, you risk the entire amount of
the premium you pay. But as an options writer,
you take on a much higher level of risk.
What you own
It's important to understand the difference
between owning options and owning stock. Shares of stock are pieces
of a company, and shareholders can benefit in ways other than
price movement, including the distribution of dividends.
They also have the right to vote on issues relating to the management
of the company.
Options holders, however, own the right to what's
sometimes described as price movement. In other words, if the
price of the stock rises, the options holder can benefit by exercising
the option and purchasing the stock below market
price or by selling the option for more than the
purchase price. But options holders don't own a piece of
the company, and don't receive dividends or have a shareholder
vote.
