Stocks versus Options costs

Comparing Stocks versus Options

Many traders and investors may not fully understand the capital benefits when you compare Stocks versus Options. If you’re new to Options, one of the first features you should understand is that Options can be very cost-effective to implement your outlook for a stock. In this example, let’s look at a stock Caterpillar (CAT). In this example, we’re going to compare Stocks versus Options costs strictly from a cost point of view.

CAT is trading around $80 today. To buy 100 shares, you’d have to spend about $8000 or if you have a margin account, then you pay half that amount – $4000.

If you were to buy an At-the-money (ATM) Option in the Dec series, the equivalent of the same 100 shares would cost about $250.

As you can see, this is very cost-effective. Of course, when you buy Options, there are other considerations like time decay and Implied Volatility, but this video is a simple example to illustrate the cost advantages of buying an option versus the stock itself.

But you must bear in mind – Options have many moving parts, and a newcomer is well-advised to learn Options and how they work, both from a theoretical and practical standpoint before you invest large sums of money. Options lose value over time, whereas the Stock is present forever. However, if you choose an Option that is far out in time, it is less likely to lose value due to time decay, and can act as a very decent substitute for buying the stock at the fraction of the costs of buying the stock itself. This video highlights some of these concepts in a practical environment.

 

 

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