I’ve read a few option books.
THANKS... This is probably the most comprehensive "greeks" article/book I’ve read.

Wonderful blog. …..
A wonder wealth of knowledge there. Thanks so much for your kindness in publishing it!

Thank you very much for the most concise and simplest option intro. Highly recommended.

So far, yours is the best blog/site on basic options notes in the web that I have chanced upon.

Thursday, April 12, 2007

Why Option Trading? (Part 2)

Click here to go back to “Why Option Trading? (Part 1)”

3. Leverage

You can potentially have greater % return of investment from options trading than from stock trading, given the same move in the underlying stock price.

For example:
A stock price of Company ABC (currently trading at $96) is expected to increase significantly over the next few weeks. The Call option price for that stock with Strike Price of $95 and 45 days to expiration is $6.
If you buy 100 shares of that stock, you need to invest $9,600 to purchase the stock. Assuming the stock price increases to $105 within 15 days, you would gain $ 900 (= 10,500–9,600) or 9% (= 900/9,600).
But if you buy 1 Call option contract for that stock instead (that gives the right to buy 100 shares), the cost will only be $600. When the stock price rises to $105, the option price may increase to $11 and you can then sell the option with a gain of $ 500 (=1,100–600) or 83% (=500/600).
As you can see, given the same number of shares, you get much higher % return using options (83%) than stocks (9%), although it is smaller in terms of actual dollar.

If, say, you buy 2 contracts of Call option for $1,200, you can gain $1,000, comparable to the dollar gain from the stock investment ($900). So, buying options allow you to gain the same profit as stocks would with only a much smaller capital and, therefore, at a much lower risk than buying stocks. In the worst case, if the stock crashes, the most you can lose is $1,200 and not the full $9,600.