Options - LeverageWhy do options offer any advantage over trading stocks? They're riskier, since they expire within a certain amount of time and their values are more complicated to assess. Since they expire the investor has to make a choice within a relatively short time frame. (Even LEAPs - Long-term Equity AnticiPation Securities - are generally written for no more than two years.) Since, as derivatives, they have no inherent worth they can move in sharply different directions from the underlying asset. One can short a stock or go long, but once bought the value of the shares is known. Even after you purchase options, their value is often solely 'time value', they're worth money only because some event may occur in the future, such as a rise in the price of the asset. Nevertheless, options are actively traded in large volumes. What do options traders know that many investors have yet to learn? One thing they know is the value of leverage. For generally around 5% of the price of the underlying asset an investor can control - even though they do not own - 100% of a quantity of stock. The multiplier effect - leverage - is one major factor in the value of options.
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