You think it's going to go above $25 yearly year. One year later, the buy stocks online is a $30 per share. Let's compare the gains you might have made with buying the stock verses purchasing the buy stocks online option. Say you purchased 100 shares in the buy stocks online. This would cost you $2500. Then you sold at $30, with proceeds of $3000 dollars.
Therefore you made $500 or 20%, so good if you had the amount of money to buy a lot more than 100 shares.Now lets take a look if you had played this move with options. A call options betting that a share will move upwards. When the buy stocks online is at $20, you buy the call option for the buy stocks online while using strike price of $25 that expires in a single year. This gives you the right to buy the buy stocks online at $25 anytime within a year from when you buy it. Now you could be asking yourself, why would I buy it at $25 when it is trading at $20 today? The answer is leverage.
That buy stocks online option could be trading at $1.00/share, which is a time value premium. If you purchase one contract (the right to get 100 shares of stock) at $25 for $1.00/share, and the buy stocks online rises to $30, those investment will now be worth $5.00/share. Let's have a look how much money you'd probably have made. Say you pad $100 for 1 contract (the right to acquire 100 shares at $1.00 per share). In other words, you might be controlling the profits of 100 shares of buy stocks online for just $100. Then you sell anything at $5.00/share, so your proceeds are $500.
Therefore, you create a 400% gain rather than a 20% gain had you obtained the buy stocks online itself.However, greater leverage comes with greater risk. Say the buy stocks online went up just to $24 as an alternative to $30. If you purchased 100 shares of the stock itself, you would make $400. But should you have had bought the stock option at the strike expense of $25 (out in the money), the possibility would expire worthless. You would lose your whole investment.
A stock may drop, but it's going to not typically drop to zero. But a stock option could become worthless overnight should you not manage your posture well.The example above can be an "out with the money" call option example. Buying investment "in the money" can be a much safer approach to play stock option. A stock option "in the money" carries a strike price below the price with the buy stocks online. Therefore, an opportunity has "intrinsic value" (the main difference between the strike price as well as the stock price).
Intrinsic value is just not lost unless the buy stocks online price drops. However, if you buy a standard option out of the money, the price with the option is 100% time value. Time value decays over time and eventually becomes worthless if your stock doesn't move up fast enough.Buying out of the money call options should be thought about gambling, when you do not know for a fact if the stock goes up or down. In the amount of money call choices less risky, however are still more risky than purchasing the stock, because you're only protected from loss until the stock drops below the strike price. But if you've got a strong conviction and seek information on stock, stock options can be a smart way to control the profits of more buy stocks online with less money.