You may be wondering why would an investor
want to get involved with complicated options, when they could just go out and
buy or sell the underlying equity? There are a number of reasons such as:
- An investor can profit on changes in an equities market price without ever having to actually put up the money to buy the equity. The premium to buy an option is a fraction of the cost of buying the equity outright.
- When an investor buys options instead of equity, the investor stands to earn more per dollar invested - options have "leverage."
- Except in the case of selling uncovered calls or puts, risk is limited. In buying options, risk is limited to the premium paid for the option - no matter how much the actual stock price moves adversely in relation to the strike price.