As a Trading Coach, I am often asked about buying a stock vs buying call options. A call option costs approximately 10% of the cost of the stock and profits approximately 70% of the stock profit. Buying calls is often the preferred way to go for those of us that don’t have gigantic trading accounts.
For example: Autozone (AZO) is $206 per share. If I bought 100 shares, it would cost $20,600. If I bought 5 contract of the AZO 200 Call four months out, it would cost $8250. ($16.50 per share x 100 shares per contract x 5 contracts)
One month from purchase date, AZO increased in value by $54 to a share price of $250. Since I bought 100 shares, my profit would be $5400. (54 x 100 shares) My return on investment would be 26% ( 5400/20600)
With the Call option, my profit would be approx $3.80 (using a delta of .70) per share x 100 shares per contract x 5 contracts = $1900 profit. (3.80 x 100 shares x 5 contracts) My return on investment would be 23% (1900/8250)
The maximum loss for the stock trade is $20,600. The maximum loss for the call option is $8250.
Just remember that when buying call and put, single leg options close your trade 30 days prior to expiration of the option. For now, just write this down as a rule that is not to be broken. I could go into a long, hairy explanation – but it is just such explanations that make trading options confusing and discouraging to many people.
I can coach you on how to trade options more successfully. I keep it simple and give you practice (homework) so that you can prove to yourself that you understand the topics. I use practical application of concepts taught by looking at live charts.
Speed your progress to consistently successful options trading. Complete the information requested on the upper right side of this page today! Let’s get started!
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