There are many reasons why traders start trading options. For some it is a way to leverage their profits and for others it is a risk management strategy. There are many ways traders can leverage their profits.

Some traders engage in short term trading. Therefore, they trade weekly options. Weekly options are options that expire within the week and are the riskiest kind of option on the market. This is because you only have a few days, sometimes only a day (depends when you buy the option) for the stock to move the necessary amount to cover the cost of the premium and make you a profit. However, with weekly options, you have the opportunity to leverage your profits on smaller moves. Many weekly options end up being 100%-500% (even more) in profits. However, it takes a good trader to spot these opportunities. You do not need to risk as much as you would have if you had bought stocks. In a high volatility atmosphere, weekly options allow traders to make short-term bets without taking the risk of losing big on a position. Every option trade (unless you are short the option) has a defined risk/reward.

Other traders want to buy long-term options (leaps). The purpose of buying long-term options is that you can get access to a certain number of shares at a fraction of the cost. The only risk is that you will lose your premium. For example, right now the AAPL $110 January 2016 call is trading at $13. This means that instead of buying 100 shares of AAPL for $10,000, you could get access to the same number of shares (1 contract=100 shares) for only $1,300. This may sound great but there are many risks to trading options.  As time goes along, your option experiences time decay. Time decay is when the option loses value each day until expiration. Long-term options have very little time decay where as short term options have a tremendous amount. The amount of time decay is dependent on how much time the option has until expiration. Don’t forget, on expiration day you need the stock to be higher (if it is a call) or lower (if it is a put) than the strike price, plus the cost of the premium to be profitable.

The risk management strategy is known as hedging. When the market is at risk of falling/is very volatile, many traders buy bearish hedges (put positions) to ensure that if the market were to fall they would not be hurt as badly. The hedges are an insurance play for a portfolio. By having hedges in tact, people are less apt to panic.

Option trading is very risky, and one should only start trading options if they have many years of experience in the market. I recommend that anyone who is interested in options takes at least a few months to first ‘paper’ trade (use fake money) so that you can get accustomed to the option market.