The great thing about Options is it allows me to participate in an expensive stock by paying just a fraction of the cost. When the stock makes a 10% move, my Option can increase to a 100%.
Say a stock costs $100, and the Option for that stock costs $3 per share. The next day the stock increases to $110. If I owned one of the stocks I would have made a profit of $10, which is a 10% return. Had I bought the option, the Option could now cost $6 per share. I would get a 100% return of investment! 1 Option controls 100 shares. If I bought 10 options, that would mean a $3000 profit from a start capital of $30.
Why is Options perceived as more risky?
The price of Options consists of 2 components: Time value and intrinsic value
Options are tied to an expiry date; the nearer the expiry date, the lower the time value. So say after 3 days, the stock has returned to the same price as the day you bought your option, the value of the Option will decrease although the stock price had not moved.
Always make sure you are aware of the risks so you can minimize or eliminate it. When looking for a trade, don’t enter just because you can profit 100%, also be sure to calculate how much you can lose. You want to stack the probability of success in your favor so that when you gain, you gain a lot but when you lose you only lose a small amount.
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