Comment on the following: Stock options are meant for speculators.

Stock option are looked upon as a speculative vehicle as well as a hedging mechanism. A holder of stock may buy a put option as a risk hedging action. A speculator is a person who simply transacts without having physical asset with him. He may buy or sell call option or put option depending upon his perception about the future behavior of price. There is an expectation of loss as well. Yet, the expectation of market increase might be such that it outweighs the expectation of loss and thus provides a desirable speculation acceptable to both parties. For example, suppose a trader has $2,000 to invest, and an XYZ stock costs $50 and an XYZ call option (with a strike price of $70 that expires in one months) costs $0.20 each. The premium is thus $2 per contract since each options contract is based on 100 shares of stock. If the trader only buys stock, there will be simply a long position of 40 shares ($2,000/$50). But, if a position is taken using only options ($2,000/$2), they would effectively control a position of 1,000 shares. In this case, any gains and losses would be magnified by the leverage gained from using options. In this example, if the XYZ stock drops to $49 in six months, in the all-stock scenario, the trader's position is worth $1,960 (a loss of $40), whereas in the all-options situation, the total value would be $0 at expiration since the options would expire worthless because nobody would agree to buy shares at a price that is greater than the current market value. The speculator's anticipation on the asset's future direction will determine what sort of options strategy that is taken. If the speculator believes that an asset will increase in value, they should purchase call options that have a strike price that is lower than the anticipated or targeted price level. In the event that the speculator's belief is correct and the asset's price does indeed go up substantially, they will be able to close out of the position and realize a gain (by selling the call option for the price that will be equal to the difference between the strike price and the market value).