What is the primary purpose of an option contract?

The primary purpose of an option contract is to speculate on stock price movements. Options give investors the right, but not the obligation, to buy or sell a security at a predetermined price before a specified expiration date. This ability allows traders to leverage their position regarding the future movements of the stock price with a relatively small investment compared to buying the stock outright.

Speculation plays a crucial role in how options are utilized. Investors can purchase call options if they believe a stock’s price will rise or put options if they believe it will fall. This speculative nature enables traders to capitalize on anticipated market movements, potentially leading to significant profits, but also carries the risk of losing the premium paid for the option if their predictions do not materialize.

While options can be used for hedging or providing insurance against stock investments, that is not their primary purpose; rather, it is one of the many strategies that traders might use. Generating income through dividends and providing liquidity are also functions of the broader market, but they are not intrinsic to the nature of an option contract itself. The core aspect remains rooted in speculation and positioning regarding future price movements of the underlying asset.