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How is buying options more profitable than buying the stock itself? And why isn’t everyone trading options instead?

Hi Traders/Investors,

These are the pros and cons I can currently think of :

Pros :

  • You can make money very fast if you get your entry right just before breakout.
  • On expiry days, sometimes there is high volatility and you can see option rising from 10 points to 100 points in matter of seconds.
  • When you are losing while buying options you know how much maximum money you’ll lose.
  • ROI is greater in options. Let’s say you buy 505 quantity of Reliance equity at 1950 and it goes to 2000. So your profit will be 25250 on investment of around 10 lacs, so your ROI will be somewhere around 2%-3%. But if you buy an option at Rs. 20/- of Reliance which has 505 lot size, and it rises by 50 points, your profit will still be Rs. 25000/- but here ROI will be 250%. But this is what make other people think they can earn a lot of money much faster, by trading in options.
  • You can also hedge your positions for your FnO Stocks, such as You have TCS stock, and you know it will fall for next few days, because it is near All Time High, then you can sell call options, or buy put options. This will allow you to make profit even when the particular script you are holding is in loss.

Cons :

  • If you take a wrong entry, you might lose entire money, if you don’t take SL.
  • If you sell options, and you don’t put SL, on high volatility day, you might lose a lot of money. Because as a buyer, you will only lose you have invested, but as a seller for every point that rises against you, you lose that much money.
  • Unlike equity, you can hold this options only for a week or a month.
  • Let’s say you bought Reliance 1940 CE at Rs. 40/- at the start of the month and at the end of the month Reliance is at 1980, then on the expiry day you will be neither in profit nor in loss, but if it stays less than 1980 then you will incur some loss. Because at the start of the month, you have to pay for Time Value, which decreases over time. This is only con for a buyer, because if seller has sold at Rs. 40/- and Reliance stays below 1980 let’s say 1970 then the seller will make Rs. 10/- profit.

Thanx for reading🙂

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Praveen Maxter

Praveen Maxter

An Intraday trader with 6 years of experience.

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