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Speculation
- Stock options are a way of leveraging
your money. This is usually done by buying call
options. You are able to participate in any upward moves of a
stock without having to put up all the money to buy the stock.
However, if the stock does not go up in price, the call option buyer may
lose 100% of his/her investment. For this reason, options are
considered to be risky investments.
Hedging
- Stock options can be used to considerably reduce risk. Put
options are usually traded for hedging purposes. While hedging reduces risk, it also limits the amounts of gains you
can make. Since most stock
markets go up over time, and most people invest in stock because
they hope prices will rise, there is more interest and activity in
call options than there is in put
options.
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