Q. A friend told me that I should buy options as a way to increase my returns on my stocks. He told me that there wasn't much of a risk. What do you think? A. F., Baltimore
A. Options allow a person to participate in the stock market without necessarily owning stock. When you buy or sell an option you pay a price (called a premium) for the right to buy or sell a stock for a specific time at a specific price. Two basic types of options are called "puts" and "calls."
A call is the most frequently traded option. A call gives the buyer the right to buy (and the seller an obligation to sell) a particular stock at a specified price during the time the option exists.
A put gives the buyer a right to sell at a set price and the seller of the put an obligation to buy.
Buyers of calls usually are expecting the underlying stock to go up in value while buyers of puts expect the stock price to decline.
Options trading is suitable for only sophisticated investors who have a thorough understanding of the techniques and the inherent risks involved. Option contracts are short-term, high risks for daring investors who want a quicker, higher return on their money but can afford and are willing to assume a higher risk.
Q. My granddaughter is just starting college and I would like to help her without incurring a gift tax. What do you suggest I do? S. M., Dallas, Texas
A. Everyone is permitted to give gifts of $10,000 a year per recipient without penalty of a gift tax. A married couple can give ++ $20,000 a year to a donee. There are no restrictions on the number of different recipients.
One way of exceeding the $10,000 limit to your grandson, if you are single, is to pay your grandson's tuition directly. No gift tax is imposed on payments made directly to a hospital, doctor, or school on behalf of another person.