Hedging with options allows traders to reduce risk. Put options can provide a form of insurance, ensuring a position's max loss and protecting your portfolio against a market downturn.
One of the main reasons investors trade options is to generate income. Similar to yield farming, options can be used to earn yield or generate an income in any market condition.
Leverage allows traders to use less money to gain exposure to the movement of an asset's price. Options have similar market exposure to owning an asset, but require less money, allowing for more leverage and flexibility for your portfolio.
Options may provide profits in any market condition – up, down, or flat. That means you can speculate on the future price of an asset, whether it goes up, down, or trades within a range.
LEARN OPTION GREEKS TO UNLOCK A NEW DIMENSION OF TRADING
OPTION’S PRICE TO THE UNDERLYING PRICE
Delta (Δ) explains how an option will react if the price of the underlying asset changes, and it can give an idea of whether an option will end up in-the-money at expiration. Values range from 1.0 to –1.0.
OPTION’S PRICE TO THE PASSAGE OF TIME
Theta (Θ) tells us how an option’s price changes as time goes by. All options eventually expire. As they approach expiry, they decrease in value. Theta tells us how quickly this decline takes place. A -.5 theta means an option goes down $.50 every day.
DELTA TO THE UNDERLYING ASSET PRICE
Gamma (Γ) expresses the rate of change in an option's delta per 1-point move in the underlying asset's price. In other words, Gamma explains convexity, or the slope of delta. It is expressed as a percentage.
AN OPTION’S PRICE TO IMPLIED VOLATILITY
Vega (V) explains how an option's price changes as (implied) volatility of the underlying asset changes. All options go up in value when the market predicts increased future volatility.
AN OPTION’S PRICE TO INTEREST RATES
Rho(ρ) expresses the relationship between interest rates and an option’s price. If negative, an option will go down in value if interest rates go up. If positive, an option’s value will go up if interest rates go up.