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 strictly from a cost point of view.
The stock is going for about $84 today. To buy 100 shares, you’d have to spend about $8400 or if you have a margin account, then you pay half that amount – $4200.
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. Paper trading first for a few months is highly recommended.
