It does provide a floor for potential losses. Other alternatives are using the futures market to insure the portfolio, or do nothing. As a substitute for direct exposures to the underlying assets and to anticipate future cash investments and divestments. They can be used for tactical asset allocation purposes, a quick cheap way of buying exposure to a market. In using the futures in this way, they eliminate the market price risk for stock selection.
Options have non-linear payoffs.
They have an insurance element. They have additional uses when compared to terminal instruments. However options have an upfront premium that must be paid. The advantage with options is that they set a floor to the potential losses, and the option holder has the option of allowing the contract to lapse. The terminal instrument contract must be settled.