SIE: 4.1.2.1. Speculating: Taking Advantage Of Leverage

4.1.2.1.  Speculating: Taking Advantage of Leverage

Why acquire an option rather than buy or sell a stock outright? The answer is simple: leverage.

Leverage is the use of debt to finance an activity. You use leverage when you borrow money from a bank to purchase a house. Leverage allows you to acquire assets at a fraction of their cost, freeing up the balance of your assets for other activities, such as feeding your family or making additional investments.

Options provide a unique source of leverage because you do not need to set aside a portion of your assets to acquire them. Options are an indirect form of borrowing. When you buy an option, you put a down payment on a security for which you may o