Options enable an investor (or trader) to obtain cost efficiency through leverage. That is, it’s possible to achieve outsize gains in comparison to the funds initially invested. However, as always, it’s prudent to be cautious. Just as it’s possible to achieve very large gains it’s also possible to suffer very large losses.
Options also enable one to limit risk exposure. Some investors don’t fully consider their risks when purchasing stock. Consider the purchase of 100 shares of $GE (General Electric) in April, 2017 for about $30.00. As of mid November, $GE was trading at only about $18, a loss of 40%! Options can be used to limit these losses in a manner very similar to insurance. In such a case, the value of the option will increase the further the price of the stock drops, compensating for some (or all) of the loss.
More earning potential
One of the most useful advantage of options is the ability to build positions of multiple legs (purchasing and/or selling several different options for the same underlying) in order to optimize the potential return of the position while simultaneously limiting the risk in adverse circumstances. For example, it’s possible to build a position that provides the best return if the underlying remains in a certain range (which is what many stocks tend to do the majority of the time). It’s also possible to build a position that would return a very high return if a stock were to move far, regardless of direction.
The flexibility of options (and their judicious use) can be very beneficial to the wise investor.