Trading with options

Options are remarkably flexible instruments. They can also be quite complex, and often appeal to those who are mathematically minded. At times the range of strategies can be overwhelming, but most popular strategies are actually relatively simple, using the leverage provided by options to increase profits or earning extra income by writing options.

Options open up a huge range of trading and hedging possibilities for traders and investors. They allow users to trade markets with a broad array of risk/reward profiles. As with CFDs and futures, option profits can be made when the market goes up or goes down. However, you can also make money if the market stays flat.

This ability to make money in all types of markets is perhaps the most distinctive attribute of using options. In addition, options have been used extensively for protecting the value of a share position or share portfolio.

Here is a quick overview of how options are used, before we go into more detail:
- Speculators use options for leverage rage and to limit risk.
- Holders of the underlying shares seek enhanced returns on existing positions and protection against adverse market movement through options.
- Eventual buyers and sellers of the underlying shares use options to guarantee minimum buying and selling prices.

 The above text is an extract from 'Trading ASX CFDs, options and warrants - the ASX way'

Reproduced with permission from Wrightbooks and John Wiley & Sons Australia.