Why do investors use options? Options are powerful tools because they allow you to create unique payoff profiles and exposures that simply aren't possible with traditional, long or short positions in the underlying asset alone, this flexibility comes from the ability to combine long and short positions in options and if desired in the underlying asset as well.
Broadly speaking, option strategies can be grouped into two main categories.
Those focused on directional exposure and those focused on volatility exposure.
Starting with directional strategies, options allow investors to take views on the direction of the underlying assets price, but with added benefits compared to just buying or selling the asset outright.
For example, you can establish long positions in the underlying with a predefined maximum loss.
This means you know exactly how much you could lose, providing a level of risk control that's hard to achieve with traditional stop loss orders, which carry the risk of getting stopped out during temporary price dips.
Moreover, options can help monetize specific price targets instead of relying on the asset to reach a certain price and then executing a manual.
Trade options can be structured to automatically capitalize on movements towards or beyond those targets, while directional strategies focus on predicting price movements.
Options also offer another unique advantage, allowing you to profit from the market's volatility, even if you are uncertain about the overall direction of the price. Change options enable you to construct positions where the profit and loss are driven solely by the magnitude of the underlying assets.
Price change, regardless of whether the price rises or falls.
In other words, you can benefit from volatility itself independent of the direction.
This is something you simply can't achieve with traditional, long or short positions in the underlying asset.
And this ability to isolate and trade pure volatility is one of the key reasons.
Options are such valuable tools in modern financial markets.
