Why trade options

5 November 2019, 03:00

Options trading strategies are usually used by investors to:

Speculate on Financial Markets

Similar to other forms of derivatives trading, options trading is used by investors to speculate on whether the value of a financial instrument will rise or fall. If an asset’s price is expected to rise, a call option can be placed, allowing the option holder to purchase the asset at a lower price and sell it for a profit once the price has risen. Conversely, a put option can be placed if an instrument is expected to fall in price, allowing the option holder to buy the instrument once the price has fallen and sell it at the agreed upon higher price to earn a profit.

Hedge Against Other Market Positions

Options trading strategies are also used to hedge against other investments traders have made in the markets. For example, an investor may use Forex options trading to hedge against an open position on the Forex market. So, if an investor has placed a long trade on the EUR/USD currency pair, they may also place a put option on the pair as a means of hedging their position. Thus, if the pair rises in value, the long trade will be profitable and the options contract will not be exercised, meaning only the premium has to be paid. On the other hand, if EUR/USD falls in price, the long trade can be closed and the put option will produce a profit.