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[Prize Event] Mechanism Upgrade! Share your options trading strategies and split up to 10,000 reward
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joined discussion · Apr 8, 2020 11:08

Chapter 4: Why Use Options?

Why do investors use options? The two main reasons are as follows:
- Make directional trades
- Hedging holdings

Make directional buy/sell
Typically, investors simply buy stocks and wait for their prices to rise, hoping to profit in the process. In reality, options can provide investors with opportunities to profit across a wide range of market conditions—whether prices are rising, falling, or trading in a narrow sideways range.
For example,If you believe that XYZ's stock price will rise, you may considerPurchaseXYZ'sCall Option. On the contraryIf you believe XYZ's stock price will decline, you mayPurchaseXYZ'sPut Option。If you believe XYZ's stock price will remain stagnant, you maySell the call or put option。
The more accurate your forecasts are regarding 1) stock price movements, 2) the magnitude of those movements, and 3) the timing of such movements, the higher the success rate of your directional trading strategy will be.
Why do investors use options? The two main reasons are: - Speculating on price direction - Hedging stock holdings Speculating on price direction Typically, investors simply buy stocks and wait for their prices to rise, hoping to profit in the process. In reality, options can provide investors with opportunities to profit across a wide range of market conditions—whether prices are rising, falling, or trading in a narrow sideways range. For example, if you believe XYZ's stock price will rise, you might consider purchasing a call option on XYZ. Conversely, if you expect XYZ's stock price to fall, you might buy a put option on XYZ. And if you anticipate that XYZ's stock price will remain flat, you could sell either a call or a put option on the stock. The more accurate your forecasts are regarding 1) stock price movements, 2) the magnitude of those movements, and 3) the timing of such movements, the higher the success rate of your directional trading strategy will be.

Hedging holdings
Think of this as purchasing an insurance contract. You insure your home, your car, and even yourself. Similarly, options can serve as insurance against a decline in the price of your stock. Suppose you hold a stock that you believe still has room to rise, but you want to limit your potential losses if the price falls. In that case, you can buy a put option for protection while still retaining the upside potential if the stock price increases.
Why do investors use options? The two main reasons are: - Speculating on price direction - Hedging stock holdings Speculating on price direction Typically, investors simply buy stocks and wait for their prices to rise, hoping to profit in the process. In reality, options can provide investors with opportunities to profit across a wide range of market conditions—whether prices are rising, falling, or trading in a narrow sideways range. For example, if you believe XYZ's stock price will rise, you might consider purchasing a call option on XYZ. Conversely, if you expect XYZ's stock price to fall, you might buy a put option on XYZ. And if you anticipate that XYZ's stock price will remain flat, you could sell either a call or a put option on the stock. The more accurate your forecasts are regarding 1) stock price movements, 2) the magnitude of those movements, and 3) the timing of such movements, the higher the success rate of your directional trading strategy will be.
Risk Disclaimer: The above content only represents the author's view. It does not represent any position or investment advice of Futu. Futu makes no representation or warranty.Read more
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