The Leverage of Trading Options
The leverage of trading options is perhaps its greatest attraction. With the simple investment of a premium a trader can nail down a price at which he or she will be able to buy or sell an equity, no matter high or low the price may go. The leverage of buying and selling options is that after paying the premium the trader may make a profit of the difference between the strike price, the agreed upon contract price, and the spot price, the price at which the contract will be settled, minus, of course, the cost of the premium paid to buy the options contract. When asking what is an option worth, the trader should think of the multiple of initial investment that can be gained with a successful options purchase.
Besides providing investment leverage, buying options provides the trader with an opportunity but not an obligation to purchase or sell equities on or before their options expiration dates. Because the options trader is not locked in to buying or selling the underlying equity he or she can only experience the loss of the premium if the stock or other equity does not change in price as anticipated.