How can options make more money than stocks if they are both based on the same thing?
In: Economics
Options allow you better leverage. If Stock X is currently at $100 and I think it’s going to be at $115 in 3 months, if I by $1000 worth of stock and then sell when it hits $115 I made 15%. But if I buy an option to buy at $110 it may only cost me $2 per option, so I buy 500 options. Now if it hits $115 I make $1500 ($5 of value, minus $2 of cost, so $3 per option at 500 options), which is 150%, 10x as much as I made buying the stock.
The trick, of course, is that my losses aren’t capped and it’s easy to lose my entire investment. If instead of $115 the stock goes to $109, the person that bought stock still made 9%, the person that’s holding onto 500 options to buy at $110 when anyone can buy at $109 is out of luck and lost all of their money.
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