How can options make more money than stocks if they are both based on the same thing?
In: Economics
The value of options isn’t directly fixed to the price of the underlying security, instead, the option only has value if the underlying security is trading at a more favorable price than the strike price, or/and there is speculation that the price will move that way.
For example, a call option with a strike 10% above the current trading price and expiring that week will probably trade at a very low price. However if someone buys that option and the security suddenly jumps at least 10%, any further movement will create a late profit for the investor. But there’s also the risk that such a price move doesn’t happen and the investor loses their entire investment in that option.
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