Knowing how much can be lost helps an investor determine a threshold for risk. When risk is known, it is relatively easy to forecast potential returns and loses and to calculate a risk-return profile.

In general, a person buying options has limited risk. A person selling options has unlimited risk. When an investor buys put or call options, they only risk losing the value of the premium paid for the option. An investor selling a put or call option risks the total value of the asset less the premium received for selling the option. Selling options entails more risk, which is limited to the asset's value falling to zero.

There are two primary reasons to buy and sell options: speculation and hedging. Speculation is betting on the price of a stock to either rise or fall. The other important use of options is hedging, or lowering risk. Hedging is a form of insurance that makes an investment in one asset to reduce the risk of price movements in another asset. Hedging reduces the overall profit potential, but it protects from large losses when the asset's value goes down. You make a bet in both directions, limiting losses. Or, if you own one important asset, believe it will perform well, but want to help limit losses if it does in fact does poorly, you can buy options to help protect the initial investment.

A number of basic options strategies help lower trading risk. Each of these strategies has its own level of risk depending on the trader's threshold.

The basic rules: buying call options limits an investor's initial capital outlay (no need to purchase all of the asset) while the profit potential is unlimited. Risk is limited to the loss of the premium paid for the option. Buying put options limits both loss and profit: the loss is limited the initial option premium, while the profit is limited to the difference between the strike price and zero.

The bet with a long call is that the underlying stock rises in value. A long call option provides a leveraged alternative to owning or buying the equivalent amount of stock. This benefit also has predetermined risk, limited to the premium paid, while the profit is unlimited.

The bet with a long put is that the underlying stock value falls in value. A long put offers a leveraged alternative selling short the underlying stock, providing less risk to the investor. An investor with a long put has predetermined, limited risk versus the unlimited risk from shorting a stock. Buying a put requires less up-front capital than the margin required to establish a short stock position. Profit is limited only by the underlying stock declining to zero, while the risk is limited to the premium paid for the option.

The married put provides the benefits of owning stock while protecting against market downturns. Matching or marrying owned shares of stock with an equivalent number of put options on the same underlying stock limits risk by protecting the stock from a decrease in market price. The married put insures against a predetermined decrease in value during the lifetime of the put, and has a limited. No matter how much the underlying stock decreases in value during the option's lifetime, the investor locked in a guaranteed selling price. Because of this guarantee, the investor has time to react and to choose to sell, or not to sell the stock, if the price does indeed fall. Profit is unlimited, while the maximum loss is limited to the stock purchase prices less the strike price, plus the premium paid.

The protective put limits the risk that gains from previously purchased shares that have gained in value will decrease. The investor wants to insure against downside market risks in the near term and wants to protect most of the accumulated gains, spending some money to buy puts that help insure against downside loss. No matter how much the underlying stock decreases in value during the option's lifetime, the put guarantees the investor the right to sell at the strike price. Because of this guarantee, the investor has time to react and to choose to sell, or not to sell, the stock, if the price does indeed fall. Utilizing the protective put strategy also retains the benefits of stock ownership, for example, dividends. The potential profit using a protective put strategy is unlimited. If the put expires in-the-money, any gains realized from in an increase in its value will offset any decline in the unrealized profits from the underlying shares. If, however, the put expires at- or out-of-the-money, the loss is limited to the premium paid for the put.

The covered call provides limited protection from price decline in the underlying stock and limited profit with an increase in stock price, it generates income because the investor keeps the premium received from writing the call. At the same time, the investor can appreciate all benefits of underlying stock ownership, such as dividends. The covered call trader writes a call option for the equivalent number of shares of owned, underlying stock. Profit is limited to the premium received plus the current stock price less the strike price, if the underlying shares are sold. The risk of loss with a covered call can be substantial if the stock price declines. Loss is the original purchase price of the stock less the current market price, less the premium.