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ECONOMICS REPORT - Protecting an Investment With Stock OptionsBy Mario Ritter

Broadcast: Friday, April 28, 2006

I'm Steve Ember with the VOA Special English Economics Report.

Stock options are a way to profit from changes in the price of a stock without the need to buy the shares immediately. Stock options are agreements to trade shares of a stock at a set price by a set date.


Stock options are agreements to trade shares of a stock at a set price by a set date

An option comes with a strike price. This is the agreed price at which the stock will be traded. Options also have an expiration1 date. After that date the agreement is cancelled.

An option holder2 buys a contract. It can be a contract to purchase or a contract to sell shares of a stock in the future.

Option holders3 commonly buy contracts to protect the value of a stock investment. Say an investor4 has recently bought stock at ten dollars a share. The investor worries that the price will drop in the next three months.

To protect that investment, the investor can buy an option to sell the shares at ten dollars each.

That way, if the stock price drops to five dollars, the investor can exercise the option and sell the shares at ten dollars. The investor loses only the cost of the option contract. But the option has served as insurance against a loss.

What would have happened had the price of the stock gone up? Say it jumps to fifteen dollars. The option gives the holder the right to sell at ten, but now that is below the market price.

In this case the investor would not exercise the option. The contract expires and becomes worthless. But who cares? The stock is now worth fifty percent more than what it was.

Some investors5 buy options because they think a stock price will rise. An option to buy a stock at today's price could be valuable if the price goes up before the option expires.

So far we have heard about option holders. Option writers are the ones who sell the contracts on exchanges. The price paid is called a premium6. It usually represents the difference between the strike price and the market price of the stock.

Options trading is organized by a clearinghouse. A clearinghouse settles trades between holders and writers and credits profits or losses. The biggest clearinghouse is the Options Clearing Corporation in the United States.

Next week, we will discuss why stock options are in the news and how they will affect American business earnings7 this year.

This VOA Special English Economics Report was written by Mario Ritter. Read and listen to our reports at www.unsv.com. And to send us e-mail, write to [email protected]. I'm Steve Ember.



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1 expiration bmSxA     
n.终结,期满,呼气,呼出物
参考例句:
  • Can I have your credit card number followed by the expiration date?能告诉我你的信用卡号码和它的到期日吗?
  • This contract shall be terminated on the expiration date.劳动合同期满,即行终止。
2 holder wc4xq     
n.持有者,占有者;(台,架等)支持物
参考例句:
  • The holder of the office of chairman is reponsible for arranging meetings.担任主席职位的人负责安排会议。
  • That runner is the holder of the world record for the hundred-yard dash.那位运动员是一百码赛跑世界纪录的保持者。
3 holders 79c0e3bbb1170e3018817c5f45ebf33f     
支持物( holder的名词复数 ); 持有者; (支票等)持有人; 支托(或握持)…之物
参考例句:
  • Slaves were mercilessly ground down by slave holders. 奴隶受奴隶主的残酷压迫。
  • It is recognition of compassion's part that leads the up-holders of capital punishment to accuse the abolitionists of sentimentality in being more sorry for the murderer than for his victim. 正是对怜悯的作用有了认识,才使得死刑的提倡者指控主张废除死刑的人感情用事,同情谋杀犯胜过同情受害者。
4 investor aq4zNm     
n.投资者,投资人
参考例句:
  • My nephew is a cautious investor.我侄子是个小心谨慎的投资者。
  • The investor believes that his investment will pay off handsomely soon.这个投资者相信他的投资不久会有相当大的收益。
5 investors dffc64354445b947454450e472276b99     
n.投资者,出资者( investor的名词复数 )
参考例句:
  • a con man who bilked investors out of millions of dollars 诈取投资者几百万元的骗子
  • a cash bonanza for investors 投资者的赚钱机会
6 premium EPSxX     
n.加付款;赠品;adj.高级的;售价高的
参考例句:
  • You have to pay a premium for express delivery.寄快递你得付额外费用。
  • Fresh water was at a premium after the reservoir was contaminated.在水库被污染之后,清水便因稀而贵了。
7 earnings rrWxJ     
n.工资收人;利润,利益,所得
参考例句:
  • That old man lives on the earnings of his daughter.那个老人靠他女儿的收入维持生活。
  • Last year there was a 20% decrease in his earnings.去年他的收入减少了20%。

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