ABSTRACT
An option can be bought for a fraction of the price of the stock to which the option relates.This is the gearing provided by an option. Options can be looked upon as either low risk or high risk investments. In both cases the interpretation of risk is based upon the gearing effect offered by options.The maximum loss from buying stock is the price of that stock, whereas the maximum loss from buying a call option on that stock is the option premium. So buying a call option on 1,000 shares of stock can be seen as less risky than buying 1,000 shares of stock.
