You may be wondering why you would want to buy call or put options instead of directly buying the stock or other asset. The answer is all about controlling investment risk.
If you buy or short sell a stock, you have to live with the results of an investment that goes up or down. Further, your gains (and losses) are limited to the amount of stock you can afford, not including margin borrowing. Options change that formula in a way that can benefit certain investment strategies.
Buying options can limit your losses. When you trade put and call options, the most you can lose is the amount you pay for the option. When you invest in an asset directly, your entire investment is at risk.
Another reason to use options is for leverage. Each option contract represents 100 shares of the asset. If you have strong convictions that an asset will go up or down, you can 100x your investment exposure using options. For example, if you buy one contract for a stock and it goes up $1 per share, your options contract earns $100. That’s an exciting prospect for some traders, particularly those with a shorter-term investment outlook.