If options were used to speculate, the option buyer would first determine which direction they expect the stock to move and by how much. They would then purchase a call for less than the anticipated price (which means they can sell at gain) or purchase a put for more than the anticipated price (which also means they can sell at a gain).
If options were used to minimize risk, the investor could purchase shares of a company and hedge this risk by buying a put on the stock. If the price of the stock increases, the investor will let the put expire and sell the stocks for a gain. If the price of the stock decreases, then the investor would exercise the put option, which gives them the right to sell at a predetermined price. This limits the losses.
0 Comments