High leverage as by investing small amount of capital (in form of premium), one can take exposure in the underlying asset of much greater value.
Pre-known maximum risk for an option buyer.
Profit potential is large and risk is limited for option buyer.
One can protect his equity portfolio from a decline in the market by way of buying a protective put wherein one buys puts against an existing stock position.
This option position can supply the insurance needed to overcome the uncertainty of the marketplace. Hence, by paying a relatively small premium (compared to the market value of the stock), an investor knows that no matter how far the stock drops, it can be sold at the strike price of the Put anytime until the Put expires.
How one uses options?
If an investor anticipate a certain directional movement in the price of a stock, the right to buy or sell that stock at a predetermined price, for a specific duration of time can offer an attractive investment opportunity.
The decision as to what type of option to buy is dependent on whether your outlook for the respective security is positive (bullish) or negative (bearish).
If your outlook is positive, buying a call option creates the opportunity to share in the upside potential of a stock without having to risk more than a fraction of its market value (premium paid).
Conversely, if you anticipate downward movement, buying a put option will enable you to protect against downside risk without limiting profit potential.
Purchasing options offer you the ability to position yourself accordingly with your market expectations in a manner such that you can both profit and protect your invested capital with limited risk.
Option is a contract which has a market value like any other tradable commodity. Once an option is bought there are following alternatives that an option holder has:
One can sell an option of the same series as was bought and close out /square off the position in that option at any time on or before the expiration.
Another way is to exercise the option on the expiration day in case of European Option or; on or before the expiration day in case of an American option. In case the option is 'Out of Money' at the time of expiry, it will expire worthless.
More experienced traders are often using options as intraday trading tool as they buy and exercise the option on the same day for making quick profits.
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