Buying Stock vs. Buying Options and the Risks involved..
Remember trading stocks and/or options is risky. So please educate yourself before putting your hard earned money at risk. See Disclaimer.
If we think a Stock is going to go up in value then, we can Buy Stock or we can buy call options or if we think a Stock is going to go down in value then, we can Short the Stock or we can buy Put options.
Let’s take a look at the SPY for example...
If we buy 100 shares of SPY @ $76.85 per share are cost and total risk will be $7,685.00
Looking at the stock if it rises in value you make money, and as the stock falls you lose money. If the stock goes to zero are maximum Risk is $7685.00.
You can own a stock for as long as you like or for as long as it has value.
If we think the stock is going up we can buy a CALL OPTION instead.
Owning an Option is limited in time.
When buying an option we need to buy an option with greater then > 30 days of time (in most cases).
We can buy 1 OTM Call Option Contract witch = 100 shares of the stock (in most cases).
The cost of this 1 Call Contract is $5.00 x 100 = $500.00 total cost.
The total risk of this trade or call is $500.00 the cost of the option.
The stock risk of $7685.00 vs. the Option risk of $500.00 – I would rather risk as little as possible.
Can you make as much money with options vs. stocks? NO, But you can make a bigger Return on Investment (ROI).
If SPY goes up to $90.00 in value you may make $1300.00 by owning the stock, and this will give you a 17% ROI.
If SPY goes up to $90.00 in value you may make $800.00 (on expiration day) by owning the Option, and this will give you a 160% ROI.
The difference is Options have less Risk and a greater Return on Investments then stocks do.
In Summery: buying Options are less Riskier and have a greater Return on Investments then stocks do. When buying Calls you must be Bullish on the underlying stock and have a target price in mind. Also buy enough time for the underlying stock to move in your favor. You can also sell the call you bought at any time before the expiration date.
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