WHY OPTIONS?

Options limit risk
a. An option gives the holder a risk-limiting position in the underlying.
b. Because they limit risk, they provide symmetric payoffs that can be
used to reshape the profit/loss profile of a position.
Option premiums and volatility
a. The single most important difference between an option and an
underlying is that the option’s price depends, to a great extent, on
how volatile the market thinks the underlying price will be over the
remaining life of the option.
b. The more volatile the market expects the underlying price to be, the
higher the option’s price (and vice versa). Just like an insurance
policy, the greater the perceived risk that the issuer takes, the greater
the premium he will charge.
c. Any increase or decrease in the market’s volatility forecast translates
directly into an increase or decrease in an option price’s extrinsic
value.
d. If the market proves to be either more or less volatile than the market
expected, the long option trade or hedge will perform better (more
volatility) or worse (less volatility) than the underlying trade or
hedge.
e. Options allow you to trade not just the direction of the market, but
its implied volatility as well.

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