InvestorQ : What are the benefits of dealing in options; both calls and puts?
Anamika Sodhani made post

What are the benefits of dealing in options; both calls and puts?

Anamika Sodhani answered.
3 years ago

Options offer flexibility to the buyer in the form of right to buy or sell without the obligation. This suits the appetite of retail investors. Another major advantage of options is their versatility. They can be structured as conservative or as speculative as one's investment strategy dictates. Some of the key benefits of trading in options are as under:

Options provide the advantage of high leverage as by investing small amount of capital (in the form of premium); one can take exposure in the underlying asset of much greater value. The leverage can be as high as 40-50 times in case of many OTM options. It can also be higher if you go for deep OTM options but that is not too advisable.

Losses are known but profits can be unlimited when you buy options. Pre-known maximum Risk for an option buyer is defined by the premium paid. That is all the buyer has to pay on the option. Large profit potential & limited risk for Option buyer is one of its key advantages.

One can protect his equity portfolio from a decline in the market by way of buying a protective put wherein one buys puts against an existing stock position this option position can supply the insurance needed to overcome the uncertainty of the marketplace. Hence, by paying a relatively small premium (compared to the market value of the stock), an investor knows that no matter how far the stock drops, it can be sold at the strike price of the Put any time until the Put expires. E.g. An investor holding 1 share of Stock "A" at a market price of Rs 3800 thinks that the stock is over-valued and therefore decides to buy a Put option" at a strike price of Rs. 3800/- by paying a premium of Rs 200/- If the market price of Stock "A" comes down to Rs 3000/, he can still sell it at Rs 3800/- by exercising his put option. Thus by paying a premium of Rs. 200, he insured his position in the underlying stock.