How can options make more money than stocks if they are both based on the same thing?
In: Economics
Options and stocks aren’t based on the same thing. A stock is a stock. It isn’t based on anything. It is a share of a company. You own a chunk of the company when you own stock.
An option is the right but not the obligation to purchase a stock/sell a stock at a particular price. There are two kinds. Calls are a bet you buy when you think a stock might rise. Puts are a bet that the price will drop.
An option only has value at the strike price and above for calls and at the strike price and below for puts. Options also have an expiry date.
The writer of the option is betting that the option will expire worthless. The writer gets paid when you buy the option, that’s how they make money, unless they are wrong on their bet of course.
In the case of Gamestop (GME), buying call options at $300 strike in Dec. 2020 was dirt cheap. Maybe a dollar or less a share because no one believed at the time that the shares would have any value. A reddit user /u/deepfuckingvalue made 30 million on gme buying shares and option. Probably 20 million of his profit was options that cost him a couple grand.
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