Why Do Companies and Consumers Buy Stock Options?

Companies and consumers buy stock options mostly in order to hedge their bets and to have protection against their open positions. For example, a specific hedge fund or company owns 100,000 shares of Tesla in order to protect their gains and lock in a sale at that specific price they would need to either sell their puts to recoup their loss or exercise their puts so they can sell at the strike price and lock in a profit on their gain.

The easiest way to have protection is by buying puts against your shares. Or vice versa you can buy calls as protect against a short position. So, if your trade does go belly up you will at least have some protection you can lock in some profits.

Are Options Riskier than Buying Shares of a Stock?

Anything that can expire worthless and that has a high probability to create a complete loss of all capital should be considered a risky investment. That is what stock options are. However, there is associated risk with everything and in many ways, stock options can be a way to de-risk portfolio positions. Although percentage wise the amount of money risked has a lot higher of a chance to go to $0, on a total value, options will typically allow consumers to risk less money in total, even though they might lose more on a percentage basis. Many consumers have risk avoiding tactics like: buying a call instead of 100 shares and waiting to see if your analysis was correct. If the call moves in your favor and you receive confirmation that it’s a good investment you can then exercise the option and buy shares at the strike price. So, in a sense yes options are riskier, but in the grand scheme of things you’re also risking fewer total dollars.

What’s the Significance of Trading Volume?

Stock trading volume is significant because it shows demand for that price at a given instance in time. This instance in time might not be reflective of the entire trading year or longer time periods, but volume is a great metric to see a demand for shares, especially on large price appreciate or depreciation days. Likewise, stock options also have volume.

All in all, some people might find stock options to be a tool they need to hedge their bets in their portfolio if things every do get very bad and they risk losing years of potential profits. For others they seek to generate a return with riskier trades and for others they want to potentially de-risk and see stock performance before they completely buy into shares.