Uses of Options
The major uses of options are:
Hedging
Options provide hedger a chance to set either a maximum buying price or minimum selling price for a future transaction without locking in this price. Options are a useful tool for hedger because options allow hedgers to know in advance at what price they will buy or sell. This allows the hedgers to plan for known returns and costs. They can take the full advantages of options if the market price in flavor of them.
Speculating
Speculator profits by buying options for a low premium and selling them for a high premium. As compare to future contract, the risk of options is limited for speculator because the maximum amount they can lose is equal to the premium. Speculators give liquidity to a market.
Arbitraging
Arbitrageurs are an important part of the options market. They are able to profit from temporary distortions in option premium. Like speculators, arbitrageurs give liquidity to a market.
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Filed under All About Options, Option Basics by on Apr 16th, 2010. 