Equities and options share certain similarities, but they also have distinct differences (see Chart 1). It is important to note that options contracts are highly diverse, with approximately 1.5 million different variations available. These options contracts are based on a variation of an estimated 8,000 types of underlying assets. Unlike equities, options are exclusively traded on exchanges, which means there is no off-exchange trading for options.
As the word literally implies, “options” gives investors choices of various different avenues for investment. Options enable investors to adapt their strategies based on prevailing market conditions. Approximately 40 million options contracts are traded daily, highlighting their’ widespread usage and popularity. In May 2023 alone, the Options Clearing Corp cleared a staggering 949.1 million contracts, emphasising the market’s significant volume and activity. For context, the options market actually rivalled the daily volume of the New York Stock Exchange, with approximately 38.3 million contracts traded daily in 2022.
By utilising options, investors can effectively manage risk by limiting potential losses. They can also hedge their positions, protecting themselves from adverse price movements. Additionally, options offer the advantage of leveraging with a relatively smaller investment amount as compared to equities. This leverage amplifies potential profits if the market moves in the investor’s favour. Moreover, the flexibility of options provides investors with the choice to take bullish or bearish positions, enabling them to align their strategies with their market outlook and investment goals.
