What is the major aim of options trading in the stock market?

What is the major aim of options trading in the stock market?

• A. To increase earnings on dividends
• B. To hedge against market risks
• C. To provide liquidity in stock markets
• D. To consolidate stock portfolios

Answer: (B)

The major aim of options trading in the stock market is to hedge against market risks. Options are financial derivatives that give the holder the right, but not the obligation, to buy or sell an underlying asset at a predetermined price within a specific time frame. By using options, investors can protect their portfolios from adverse price movements in the underlying assets. This risk management strategy allows traders to limit potential losses or lock in gains on their positions. For example, if an investor holds a stock that they believe may decline in value, they can buy a put option, which gives them the right to sell the stock at a set price, thereby reducing potential losses if the stock does indeed fall. This ability to hedge makes options a valuable tool for managing risk, which is a critical aspect of trading in financial markets.

The major aim of options trading in the stock market is to hedge against market risks. Options are financial derivatives that give the holder the right, but not the obligation, to buy or sell an underlying asset at a predetermined price within a specific time frame. By using options, investors can protect their portfolios from adverse price movements in the underlying assets. This risk management strategy allows traders to limit potential losses or lock in gains on their positions.

For example, if an investor holds a stock that they believe may decline in value, they can buy a put option, which gives them the right to sell the stock at a set price, thereby reducing potential losses if the stock does indeed fall. This ability to hedge makes options a valuable tool for managing risk, which is a critical aspect of trading in financial markets.