16. What Is an Option?

“We’ve never lost an American in space; we’re sure as hell not gonna lose one on my watch! Failure is not an option.”

—Gene Kranz (played by Ed Harris) in Apollo 13 (1995)

Often it is said that Options are risky investment instruments, and that is true. However, it is less frequently said, but even more true, that Options are the single most versatile instrument to limit and define risk. When used as a hedge, Options provide more protection and are better at stopping losses in a portfolio than any other investment vehicle. If you’ve ever traded an Option, you know they are no longer considered obscure derivatives used only by the most sophisticated traders. The volume of Option contracts is growing at an astronomical rate. ...

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