What are options?

Options are derivative financial instruments that derive their value from an underlying asset, such as a stock or commodity. An option is a contract that grants the buyer the right, but not the obligation, to buy or sell the underlying asset at an agreed-upon price by a certain date. Due to their expiration dates, options are considered wasting assets, losing extrinsic value over time, which is a key concept for thetagang traders.

Why Trade Options? There are two primary reasons for trading options: hedging and speculation.

• Hedging: Investors use options to protect their positions in the underlying asset. For example, an investor can purchase put options to guard against a potential decline in the stock they own. Similarly, call options can be used to hedge against a rise in a stock they are shorting.

• Speculation: Traders can use options to make directional bets on the underlying asset without having to invest the full amount required to buy or sell the asset outright. This allows for significant leverage, potentially leading to substantial profits.

Why Trade Options Instead of the Underlying Asset?

Options provide leverage, enabling traders to control a larger position with a smaller amount of capital. Each standard options contract represents 100 shares of the underlying asset, allowing traders to gain significant exposure without committing the full capital required to purchase 100 shares directly.