# The option is "purer" in its risk---what is meant by this?

In the book "The Concepts and Practice of Mathematical Finance" author M. Joshi writes on page 12 the following:

"From the point of view of risk, we can regard an option as an attempt to encapsulate a specific piece of risk. As the option is purer in its risk, its value is more sensitive to market changes, and therefore the amounts to be gained and lost on options are much larger. However, it would be a mistake to view an option as a risky asset which only the foolhardy would buy. The purpose of an option is to allow the buyer to guard against certain events and thus reduce his risk. The best metaphor for an option is to regard it as concentrated acid---handled carefully a very important tool, but used carelessly very dangerous." [My italics]

I am not sure as to what the author precisely means by the sentence "As the option is purer in its risk (...)". What is meant by 'purer' here? I find it to be very cryptic, and I just cannot make sense of it. As a result, I'm also unsure if I understand the other points he makes here.

So my question is simply: What exactly is meant here (specifically about the option being "purer" in its risk)?

• An option's price can go to zero, and often they do. And in this sense it has more "concentrated risk" or "purer risk" than the underlying (a stock only goes to zero in exceptional cicumstamces, such as bankruptcy, with an option it is common). Commented May 16, 2022 at 2:34
• Agreed with @nbbo2, "purer" in this context means "more concentrated", that's why Mark Joshi then draws the parallel with a "concentrated acid". Imagine a stock trades at 100 and you have a bullish view and you have 1000 to invest. You can buy 10 stocks. If the stock price goes to 120, you made 200, if it goes to 80, you lost 200. An ATM call option expiring in 1 year costs 8. You can buy 125 options: if the stock goes to 120, you made 125 * 20 = 2500. If the stock goes to 80, you lost everything. Commented May 16, 2022 at 8:20
• In my opinion the comment above with its numerical example could be a complete answer... Commented May 16, 2022 at 12:37
• @nbbo2: I am fine with that :) Commented May 17, 2022 at 14:43