If the stock price rises significantly, buying a call option offers far better benefits than owning the stock. To make a net profit from the option, the stock has to exceed the strike price, enough to offset the premium paid to the call seller. As we mentioned, options trading can be riskier than stocks. But when done correctly, it has the potential to be more profitable than traditional equity investment or can serve as an effective hedge against market volatility.
Because they're cheaper to buy than an equivalent number of shares, options also give you the magic of leverage. This ingenious feature allows you to make profits that, at best, are very disproportionate to your initial investment. Read on to learn more about the difference between stocks and options, and how trading options (or stocks) may be right for you. There are situations where buying options is riskier than owning stocks, but there are also times when options can be used to reduce risk.
While stocks are generally more expensive than options and can lose all their value, options expire worthless after specific dates. Options allow the investor to trade not only with the movements of stocks, but also with the passage of time and the movements of volatility. Buying options with a lower level of implied volatility may be preferable to buying those with a very high level of implied volatility, due to the risk of a greater loss (payment of a higher premium) if the trade fails. Both stocks and options can be beneficial assets to your investment portfolio, but all trades and investments involve potential benefits and potential drawbacks that should not be taken lightly.
When you buy a call option from the option maker or seller, both agree on the strike price or what they would pay to buy the underlying stock. Deed to sell is a favorite strategy of advanced options traders, since, in the worst case, the stock is assigned to the put option writer (they have to buy the stock), while the best case scenario is that the writer withholds the full amount of the option premium. But there are many options contracts linked to Tesla shares that expire throughout the calendar and there are far fewer parties analyzing and trading each of them. And options market makers make a living selling options to retail investors and others who love them like you, so connect the dots.
The exact amount of profit depends on the difference between the share price and the option strike price at expiration or when the option position is closed. Investors and traders trade options either to hedge open positions (for example, buying put options to hedge a long position or buy calls to hedge a short position) or to speculate on possible price movements of an underlying asset. Before buying or selling options, investors should read the Standardized Options Characteristics and Risks booklet (PDF 17.8 MB), also known as the options disclosure document. The use of options also allows the investor to trade in the third dimension of the market, if not going in the direction.