Explain how options can decrease or magnify risk? 2-3 paragraphs

Explain how options can decrease or magnify risk?

2-3 paragraphs

Expert Solution

Complexity and volatility are part of the options market. For this reason it’s important to fully understand the risks associated with options trading before using these strategies in your portfolio.

Compared to buying (or selling) stock, options are highly leveraged investments with a potential for relatively high returns. This is because a change in the price or volatility of the underlying security can cause a large swing in the price of the option. The effect is magnified because the lower price for options can increase (or decrease) faster percentagewise for every $1 rise (or fall) in the stock price (more on that below).

Risk can also be reduced using options.

Eg: Suppose i am a crude oil refiner. The risk i am facing is rise in the crude oil prices. So in this scenario i enter into a call to buy crude at a specific rate in the future. Here i have locked my price of crude oil and risk of movement of oil is eliminated thereby the risk is reduced.

jeff jeffy answered 2 years ago

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