Options Trading Return on Investment

1. Options Trading
Return on Investment

2. The point of stock options trading is the
return on investment of time and money.

3. The best options trading return on
investment comes from hedging risk and the
investment leverage inherent in options
trading.

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5. A good options trading system takes both of
these requirements into account.

6. Let us look at the basics of options trading
and at options trading return on investment
under two trading scenarios.

7. Buying Options

8. Stock options buyers purchase call contracts
or put contracts.

9. A call gives the buyer the right to purchase
stock at the strike price or contract price no
matter how high the price of the stock might
rise.

10. The buyer is under no obligation and simply
pays a premium to buy stock under contract
conditions if doing so will be profitable.

11. Buying puts gives the purchaser the right to
sell stock at the strike price no matter how
low the price might fall.

12. In each case the buyer of an option limits his
risk to the price of the contract.

13. And, when a buyer pays the premium to
purchase an options contract this price is
substantially less than the price of the stock.

14. Options Trading
Return on Investment
Example

15. As an example, a trader pays $300 for $102
call options on XYZ Company which
currently sells for $100 a share.

16. Based on his research he believes that the
price of the stock will go up.

17. The strike price of the contract is $102 so
the price of the stock needs to go up above
$105 a share for the trader to make money
on the contract.

18. Let us say that his fundamental stock
analysis and technical market analysis are
correct and the stock goes up to $115 a
share.

19. He will pay $102 a share if he executes the
options contract and then he will sell the
stock for $115 a share for a $13 a share
profit or $1,300 for 100 shares.

20. He paid $300 for the premium so his options
trading return on investment is $1,000 on a
$300 investment.

21. On the other hand he could have purchased
the stock at $100 and sold at $115 a share
when it went up.

22. But since he only had $300 he could only
have purchased three shares so he would
have made $45 on a $300 investment.

23. If he had chosen to buy 100 shares of the
stock he would have made $1,500 on a
$10,000 investment.

24. Here two tables showing the results of the
three scenarios when the stock goes up
from $100 to $115 and also three scenarios
for when the stock goes down from $100 to
$85 in price.

25. XYZ Stock Goes Up from $100 to $115
Which of three choices Investment Return
Rate of Return
Buy calls on 100 shares
$300
$1,000
333%
Purchase three shares
$300
$45
15%
Purchase 100 shares
$10,000
$1,500
15%

26. XYZ Stock Goes Up from $100 to $115
Which of three choices
Investment
Return
Rate of Return
Buy calls on 100 shares
$300
$1,000
333%
Purchase three shares
$300
$45
15%
Purchase 100 shares
$10,000
$1,500
15%

27. These tables demonstrate our point about
options trading return on investment as well
as hedging risk.

28. When a stock goes down in price it is better
to have held call options than to have
bought the stock as the risk is limited by the
cost of the options premium.

29. When the stock goes up in price it is better
to have purchased calls than to have bought
the stock as the options trading return on
investment is 333% while the return on
investment in this case is 333% while the
return on investment from purchasing the
stock is 15%.

30. Of course this is simply a hypothetical
example but please use it as an educational
example regarding options trading return on
investment.