How can options make more money than stocks if they are both based on the same thing?

Question

How can options make more money than stocks if they are both based on the same thing?

In: Economics

Answer 1

Imagine a stock is $10/share, it goes to $20/share, so you can spend $10 and make $10 by buying and selling it. Now if the stock instead went down to $9, you have lost $1

Or you can buy an option, you pay $10 for the right to buy 100 shares at $10 (you lose the $10 in either case). So you spend $10 on an option to buy 100 shares at $10, and then it goes up to $20, so theoretically, you could buy 100 shares at $10 for $1k, and then immediately sell them for $20, instantly getting you $2k (well, $1990 when you subtract the cost of the option), you’re broker will loan you the $1k for an instant to let this go through, so you don’t actually need $1k.

Now, with an option if instead the stock went down to $9, it would be worth -$900. However, it’s an option so you actually just lost $10 you spent in the first place.