Making Money with Options Vs Making Money with Stocks
So you want to make money – lots of it, but you realize that by investing in stocks – even if you are right– –you can only make so much — unless you commit a lot of capital. If a stock moves 10%, a $1,000 investment would give you just $100 in profit, not exactly enough to make a living on or even to consider as a decent source of side income — especially when you also factor in losing days to balance off your winners.
Is there any way to amplify your returns? If a stock moves 10%, can you generate more than that 10%? Can you generate say 50% or 80% — or even 150%?
Well, the answer is yes. That’s where options com into play.
options leverage
Options: Calls and Puts
You may have heard options. Call options let you bet the price of a stock will go up and put options let you bet it will go down.
But what’s so special about options that lets you make a lot of money in a way that you can’t make by buying regular stock?
The answer? Leverage.
Make Money with Options: Options Leverage
With options leverage, instead of investing $1,000 in a stock. You can, for example, use $200 in an options bet on that stock and leverage up your returns. So if the stock goes up 10% — your $200 option bet will go up by an even larger amount– say, 50%, depending on which option you choose. So instead of that $1000 stock investment becoming $1,100 when that stock goes up 10%– now your $200 option bet becomes $300. In both cases, you generated a $100 profit– but with your option trade, you only risked $200 instead of $1,000 for the same level of return.
Options: Doubling and tripling Your returns
Now, if you had put the entire $1,000 into options instead of stock, that $1,000 would be worth $1,500– a 50% return instead of a 10% return. Now of course, the trade could go against you and you could lose more as well. But with options, the most you can lose is how much you put in. Whereas the most you can gain? — Well, there is no limit to how much you can gain. It is very possible and quite common for options to exceed a 100% –doubling or even tripling in value when the underlying stock makes a big move.
make money with options
Options Risk Vs Reward
Many traders like the risk to reward ratio of options. You can risk $100 — and that $100, if you’re right, could become $200 or $300 versus a worst case downside scenario of -$100. This is what makes options so appealing to many traders — especially if you are able to use them when the probabilities are in your favor.
Options are a great way of achieving leverage. The tricky part is that you have to pick the direction correctly –at least with this basic strategy– but if you are right, your options will explode in value — much more so than if you had just bought the underlying stock or ETF. When that explosion happens, you’ll realize you can make much more money with options than you can with stocks — assuming if you’re right.
There are more nuances involved — including time and volatility — and directional bets are not the only kinds of bets you can make with options, but that’s the general idea and benefit of options –making smaller-sized bets on a stock price that results in a larger percentage return on your money than you would normally get by investing in the stock itself. Options let you leverage smaller amounts of money to achieve larger returns on your capital.
Learn More About Options
Leverage is just one of the many benefits that options have to offer. To learn more about these check out the other videos in the How To Make Money With Options video series with LifeStyleTrading101.com. Make sure you subscribe to our youtube channel and visit our website for daily stock market updates on the S&P500 – and learn how to make $1,000 every week using options and futures.
