[rjkennedy98]

Except for possibly commodities what is the purpose of these options. So far as I can tell it’s just gambling. Guessing whether a stock price will be slightly higher in a few weeks isn’t investing. These people aren’t doing due diligence and reading through prospectuses and understanding the proper value of the companies. They are just reading r/wallstreetbets and literally gambling on popular stocks. How does this do anybody any good? It just produces a few people who get massively lucky and a lot of people who lose everything. Neither one deserves their outcome and we are all worse off for it.

[ericmay]

Think about it like this:

Imagine you're the finance manager for an endowment of a university. You may have a fiduciary duty to grow the endowment by x%/year or not really lose all the money you have. Maybe if your endowment drops by 10% that means you can't fund the physics research department.

Now, what can you do about it? You want to protect the investment, but you can't predict the future. So instead you pay people for the option to buy shares of stock at a certain price or sell shares at a certain price. You know that if your investments drop some % it means you can't fund the physics department, so you pay a small amount of money to insure that if something crazy happens, like a pandemic, that you don't lose 10% or more of your endowment.

I know that's not the best explanation, but hopefully you get the gist of it. People who do options trading are trading with a leveraged exposure to the price of a stock. They potentially can be left with $0 because the options become worthless, so they're taking the risk of that happening with the hope that the stock price moves in a certain direction, so that the people who need to protect their money will pay them in order to protect against stock price movements.

Hopefully someone else can chime in here too with something more concise.

W.R.T this scenario with Robinhood - this will sound callous but it's a non-story. There's no HUGE problem that needs to be solved here besides Robinhood (and other applications) being more strict about letting people trade options. People take risks, they live life. Sometimes they make mistakes and commit suicide. It's incredibly tragic, it really is, but millions of people trade options and it is a functional aspect of capital markets.

[kls]

TLDR; they are investment insurance, and they serve a purpose but like every market they attract speculators.

[rahilb]

Sophisticated investors can use options to construct payout graphs that are not linear, e.g. you can form an M shaped payout with knock out puts & calls. They’re actually used to manage risk, not gamble. Most option activity is large investors limiting exposure, or big banks creating or hedging structured products (which are generally not available to non institutional investors).

[gerty]

Options can probably first be seen as a form of insurance - you pay a small price to protect yourself against upward/downward movements. It's of course taken to the next level by r/WSB as a tool for leveraged gambling.