Are Options Risky?

• When you buy an options contract, you pay a premium to the seller. The premium price for options are much more volatile than most stock prices. If the options premium price rises in your favor, you can make large percentage gains over a relatively short period of time. It is possible, however, that the price of the premium can also quickly decline and you can potentially lose your entire investment.
  
  

Can I Trade Options on Any Stock?

• In order to trade options on a stock, it must be considered optionable by the Chicago Board of Exchange, which regulates stock options. To be optionable, the company must be listed on one of the major exchanges, including NASDAQ, the American Exchange or the New York Stock Exchange. Over the counter stocks are not optionable. In addition, the share price must be above $3 and the company must have at least 7 million shares outstanding.
  
  

What is Liquidity?

• Option liquidity refers to the availability of buyers and sellers for each contract. Most optionable stocks have a large number of options contracts with different strike prices -- the price you can exercise the contract at -- and different expiration dates. Contracts that are closest to expiration and that have strike prices closest to the current market price of the stock they trade on are usually the most active, or liquid. Other contracts may not have enough liquidity to allow traders to easily buy or sell them.
  
  

What is Triple Witching?

• Options contracts expire on the third Friday of each month. Four times a year, however, options expiration day coincides with the expiration of index futures and options on index futures. The third Friday of March, June, September and December is called Triple Witching day, when all three contract types expire at the same time. Triple witching day sometimes causes unusual price swings in the stock market as investors adjust their holdings in response to contract expiration dates.