Why Use Options?

Jun 8, 2017 by

There are various advantages of using options like there is no restriction that you can make profit only when the market rises. In fact, even if the market goes down, you can make profit due to the versatility of options. You can choose to be a buyer or seller. A buyer can exercise his right to choose but a seller might be obligated to sell or buy. Infinity App can help you to use options.

Options are usually used by investors mainly due to four reasons. They are:

  • Speculation.
  • Hedging.
  • Spreading.
  • Creating synthetic positions.

Speculation

To make a bet on the outcome of future cost is called speculation. Based on intuition, a speculator might expect that the price of a stock will rise and hence he looks forward to selling it at a higher price. Some traders find it very lucrative to speculate in this way with a call option since leverage is provided by options. You must be correct while determining the stock’s movement and the timing and magnitude of this movement. You can only succeed if you make the correct predictions regarding a stock going up or down. Also, you must have an exact idea about how much the price will change and the time frame for all this to happen.

Hedging

Options were mainly invented for hedging. This strategy can help in reducing risk at a reasonable price. These are very useful for large institutions and also the individual investors. This can be helpful in restricting your downside and enjoy the full upside in a cost effective manner. Call options can be used by the short sellers for restricting losses if there is an incorrect short bet.

Spreading

Using of two or more options positions is called spreading. It helps in combining speculation (market opinion) with hedging (limiting losses). These have a very low cost for implementation and thus these strategies are preferred although at times it can limit the potential upside. Most of these spreads involve selling of one option so that they can buy another. A trader can make a profit by constructing a spread from any market outcome even if it does not move up or down. Hence, it has a versatility of options.

Synthetic positions

Synthetic position is a special type of spread. It aims to create a position behaving exactly like some other position without any need for controlling the other asset. For instance, if a person buys an at-the-money call sells a put at the same time with the same expiration and strike; a synthetic long position will be created in the underlying asset.

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