Part 4 Institutional Trading

Advantages of Option Trading

Leverage: Small premium controls large exposure.

Flexibility: Can profit in any market—up, down, or sideways.

Risk Management: Limited risk for buyers.

Income Generation: Option writing provides steady cash flow.

Risks of Option Trading

Despite advantages, options carry risks:

Time Decay: Options lose value as expiry approaches.

Volatility Risk: Changes in implied volatility can hurt positions.

Liquidity Risk: Some options may not have enough buyers/sellers.

Unlimited Risk for Writers: Option sellers face theoretically unlimited losses.

Options vs Futures

Many confuse options with futures. Key differences:

Futures: Obligation to buy/sell at expiry.

Options: Right, not obligation.

Futures: Unlimited risk both ways.

Options: Buyers’ risk limited to premium.