Often, investors are in the position of reacting to rapid and unexpected changes in the market. The transaction costs and price impact of buying or selling a portfolio's stocks on short notice preclude many investors from reacting to market intelligence. Shorting stocks is an even less accessible option for the average investor because of the margin and risks involved.
The flexibility that options provide can help you take advantage of the profits from market cycles quickly and easily. A long call option on CBOT DJIA futures profits at all levels above its strike price. A long put option profits at all levels below its strike price. Let's examine both strategies.

Capturing Upside Profits
Scenario: In August, the DJIA is 7800 and the CBOT DJIA September futures is 7850.
You expect the current bull market to persist for a while, and you would like to ride the trend without tying up too much capital and by taking only limited risk.

Strategy: Buy a September call option on CBOT DJIA futures. Recall that these options expire at the same time as September futures, and the futures price equals the cash index at expiration.

You are moderately bullish, so the 8000 call (out-of-the-money strike price) is a reasonable alternative at a premium of 10.10. You pay $1,010.00 for the call ($100 x 10.10).

Results: At September expiration, the value of the futures contract is 8,110. Now, your call is in the money, and you exercise it and earn $90 ($1,100 - $1,010). If the CBOT. DJIA futures contract stays at or below 8000, you let the call expire worthless and simply lose the premium. This is the maximum possible loss on the call. If the futures contract increases by 101.00 points above the strike price, you break even.

Comments: An alternative to buying the call option would have been to invest $78,000 directly in the DJIA portfolio. Given a value of the DJIA of 8110 in September, you would have had a gain of $3,100. If you had invested directly in the stocks, however, an unexpected market decline would have led to a loss.

Taking Advantage of Market Reversals
Scenario: You expect a reversal of the bull market and would like some downside protection.

Strategy: Buy a put with a strike price of 7700 (out of the money). The premium of the put is 9.80, for a total cost of $980.00. If the DJIA decreases to 7600, with a corresponding decrease in the futures contract in September, the put is exercised at a value of $1,000. The maximum loss is the total premium cost, which is lost if the CBOT DJIA futures contract stays above 7700 at expiration and breaks even when the futures contract decreases by 98.00 index points below the strike price.