Why options?

[Arf]

I was interested why people trade options rather than the underlying or indeed alongside the underlying.

I have a basic knowledge of options (more from the practical side rather than from a traders viewpoint), but I am interested to hear all the varied reasons they are traded.

Fire at will...

 

[Rhody Trader]

The reasons are varied. You can do things with options you cannot do with the underlying. I personally trade them because of a better risk management profile.

 

[Martinghoul]

They offer a smooth continuous payout, which, as Rhody said, means a smoother risk profile.

 

[Arf]

Thanks, could you elabhourate?

 

[Rhody Trader]

To use a simple example, owning a call has an absolute risk limit - the cost of the option - while if you own a stock its price could gap right through your stop and cause you to lose more than you had intended to risk.

 

[Martinghoul]

So, to say what Rhody said in different way, owning options allows you to be long liquidity.

 

[options-george]

Options also provide leverage. You need less funds to get the same exposure with options than you would with buying the stock itself.

The cost of the leverage is the time decay associated with a long option position.