Option prices are set by buyers and sellers on the exchange floor where all trading is conducted in the open, competitive manner of an auction market. Flexibility Options are an extremely versatile investment tool. Some basic strategies are described in a later section. That leverage means that by using options you may be able to increase your potential benefit from a stock's price movements. Although the dollar amount gained on the stock investment is greater than the option investment, the percentage return is much greater with options than with stock.
Leverage also has downside implications.
If the stock does not rise as anticipated or falls during the life of the option, leverage will magnify the investment's percentage loss. You should take note, however, that as an option buyer, the most you can lose is the premium amount you paid for the option. Unlike other investments where the risks may have no limit, options offer a known risk to buyers. An option buyer absolutely cannot lose more than the price of the option, the premium. Because the right to buy or sell the underlying security at a specific price expires on a given date, the option will expire worthless if the conditions for profitable exercise or sale of the contract are not met by the expiration date.