I'm currently trying to understand why anyone would trade options contracts speculatively. So far I've found 3 possible reasons:
- Because the underlying asset cannot be traded directly (i.e. you can't directly trade wheat without taking physical delivery).
- To leverage their position
- "Options may be used conservatively to create a position with the same profit potential as the underlying asset, but with less risk of loss"
With regards to the first of these points, I can understand that in a minority of cases, this may be a valid point. However, you still hear of people trading futures on stocks, currencies and tradable assets.
The second of these points does not explain the practice either, as most brokers offer customers the ability to leverage their positions when trading an asset directly.
The third point is something I have read online, and I assume that it must be false, since it would otherwise contradict the no arbitrage principle.
So what reason is their to trade options contracts speculatively (rather than just trading the underlying asset directly), presuming that there is a market for the asset.