[darrin]

Options are sometimes more liquid than the underlying stocks, allowing you to hedge when you wouldn't be able to directly. Consider a case where you want to short a particular stock. Shorting a stock requires borrowing it first, but some stocks may simply not have many people willing to lend. Often you can still get puts on hard-to-borrow instruments to hedge your position. There will be a premium for that insurance, but it may be worth it depending on your position.

Options also allow you to bet on more specific stock movements. Maybe there's a merger rumor and you think the stock will either go up (merger goes through) or down (merger fails). You couldn't make that bet with a static position on the underlying, but you could buy a put and a call (straddle).