How do options work...in your own words? Why do major investors use them so much? Why do major investors ste

Question

er clear of buying actual stock shares and buy options? What is a multiplier in an option play and how does that work?

Answer 1

There is more than one purpose for an option.
1. They can be used to speculate with a great deal of leverage. Many speculators use them for that. Non investors, speculators.
2. They can be used as a hedge--insurance--against a market selloff. Many investors use them for that purpose. For example, say you have $100,000 portfolio of stocks and you are concerned tthat they might drop in price, but you do not wish to sell and suffer the tax consequences. You can buy put options against a high beta stock or index and protect yourself. If prices do fall the losses in your portfolio will be mitigated by the gains in your put options.
3. They can be used to enhance portfolio returns. By selling call options against your portfolio, you can reap a substantial premium on your portfolio.

I a certain there are other reasons why people buy and sell options, but those are the 3 that I am familiar with.

Answer 2

Options are contracts to buy or sell shares of stock (usually 100 shares per contract) at a fixed price for a set period of time.

Sellers of options do so to enhance the income in their portfolio.

Buyers of options do so to get higher percentage returns for share price movement with limited (dollar wise) investment and down side.

Options can be used as portfolio insurance, for conservative income enhancement or aggressive capital appreciation.

They are tools an investor can use to help his wealth grow. A significant amount of knowledge and research is required to be consistently profitable with options.

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Answer 3

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If you are asking gor the basic definitions and capabilities of options, I can think of no reason to use my own words and possible introduce at typographical error or poor wording. You can get that information from a reliable source such as

http://www.888options.com/basics/whatis/default.jsp

If you are asking what can be done with options, there are may possibilities, including:

o Businesses use options to protect themselves from future price chanage. For example, suppose my company agrees to sell your company 100,000 copper widgets a week for the next two years at a fixed price. If the price of copper skyrockets it could put me out of business. To protect myself, I might buy options to buy copper at a certain price in the future. That protects me from a big increase in the price of copper while allowing me to benefit if from any significant decrease it the price of copper that may occur.

o Some companies, institutions and individuals use options to lower their cost. For example, I heard (but have not confirmed) that some years ago when Microsoft had a program to repurchase some of their shares, they sold put options instead of simply buying the shares on the open market. If they were assigned, they bought the shares at a discount from the price at the time they sold the option. If they were not assigned, the used the premium from the options to increase their bottom line.

o Some use options to reduce their risk from an adverse change in the future price of the underlying.

o Some use options to increase the amount of leverage they have, thereby increasing their return if their projections are correct.

o Some use options to try to make money from the pricing characeristic of options. For example, a trader buying a time spread is usually trying to make money from the more rapid time decay of a shorter term option.

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Because they expect better results using them.

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I think you are overestimating how much most major investors use options instead of actual stock.

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The multiplier indicates how much of the underlying is represented by each option contract. For example, with most stock options the underlying is 100 shares, so the multiplier is 100. That means each option contract is for 100 shares and the option premiums you see in option quotes must be multiplied by 100 to get the actual per-contract price.

Answer 4

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