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chapter2/3 leverage

Chapter 2


Another method of limiting risk is to purchase options outright. The call option holder will profit from a rise in the underlying stock price without the risk of large losses if the stock price declines. The risk is limited to the cost of the option. The cost of the option can be a small fraction of the cost of buying the equivalent amount of stock, and the option can be used to leverage a small amount of funds to take a position in a large amount of stock. Leveraging is inherently risky, there is typically a greater than 50% theoretical chance of the option expiring worthless and an even greater chance of incurring some loss.


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