Part 3 Learn Institutional Trading

Purpose of Option Trading

Option trading serves three main purposes:

Hedging (Risk Management):
Investors use options to protect their portfolios against adverse price movements. For instance, if you hold a stock, buying a put option acts as insurance—allowing you to sell the stock at a predetermined price even if the market crashes.

Speculation:
Traders use options to bet on future market direction. Options allow traders to gain exposure with limited capital, as the premium is usually a fraction of the asset’s full price.

Income Generation:
Investors can sell (write) options to earn premiums. For example, selling covered calls against owned stocks generates additional income, even if the stock price remains stable.