Standardized option contracts provide orderly, efficient, and liquid option markets.
Flexibility
Options are an extremely versatile investment tool. Because of their unique risk/reward structure, options can be used in many combinations with other option contracts and/or other financial instruments to seek profits or protection.
Leverage
A stock option allows investors to fix the price, for a specific period of time, at which an investor can purchase or sell 100 shares of stock for a premium (price) which is only a percentage of what one would pay to own the stock outright. This allows investors to leverage their investment power while increasing their potential reward from a stock's price movements.
Limited Risk for Buyer
Unlike other investments where the risks may have no boundaries, options offer a defined risk to buyers. An option buyer absolutely cannot lose more than the price of the option, the premium. Because the right to buy or sell the underlying security at a specific price expires on a given date, the option will expire worthless if the conditions for profitable exercise or sale of the contract are not met by the expiration date. An uncovered option seller (sometimes referred to as the uncovered writer of an option), on the other hand, may face unlimited risk.
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