Options demystified: Learn how to use options safely

— -- Q: Can you direct me to a website that shows how options are traded?

A: Options are one of the most misunderstood financial instruments.

They are financial contracts giving you the right, but not the obligation, to buy something for a preset price at a preset time in the future. Options let traders control massive amounts of stock with very little upfront cash. When used to speculate, options can greatly magnify losses and gains.

But options, used correctly, have an insurance aspect that can be of value for many investors. One of the key reasons options exist is that they give investors the ability to protect their portfolios. Just as you pay a premium for an auto insurance policy, options allow you to pay a fee to protect your portfolio from disaster.

And that's why, if you're interested in buying insurance to protect your portfolio, it's worth your time to learn more about how options work. This previous Ask Matt column describes how options work.

You can learn a great deal more about options from the Chicago Board Options Exchange's Options Institute.

And online broker TradeKing provides a helpful place to learn about options, here. Be sure to check out the electronic version of TradeKing's Options Playbook, which is one of the more approachable books on the topic.

Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Click here to see previous Ask Matt columns.