If you’re a trader or investor looking for some flexibility and a cost-efficient strategy, options investing is worth considering and studying. If this is something new to you, read on below to learn more about this strategy so you can take your portfolio to the next level.

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What are Options Investing?

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Options are financial contracts that allow a trader or investor to lock in a price for stock shares within a specific time frame. The contract has an agreed share price, where a premium is paid by the buyer. The buyer has the right to buy or sell at a determined strike price but is not under any obligation to do so. 

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How Do Options Investing Work?

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Compared to purchasing shares of stock, you’re not required to put up as much capital upfront when you’re buying a contract. The contract premium will be much lower than the cost of stocks, but you will have the opportunity to buy the stocks at a lower price in case the stock prices go up in the next few days or weeks.

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Let's look into the difference between buying Microsoft (MSFT) stock and buying MSFT stock options over one year. Here’s a chart for reference:

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Buying shares of stock:

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MSFT was worth $217 per share on January 4, 2021. Buying 100 shares would have required an investment of $21,700.

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Buying Options:

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It shows that an option with a strike price equal to the current price and a maturity of 620 days had a value of $3,500 per contract. This means that a person could have bought about six MSFT call options for a $21,700 investment.

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Let's examine the variations in returns at the end of 2021 even though both would need a comparable amount of capital. 

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Comparing Stock Investing and Options Investing

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Take note that shares of stock don’t expire, while options contracts have an expiration date. 

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You have the same goal: to profit from the price changes.

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Microsoft's stock price increased from $217 to $341 between January 4 and December 28, 2021. This would give you an impressive 57.1% return on your investment!

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If you had invested $21,700 in Microsoft stocks, your investment would have grown to $34,000 in just 12 months.

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Over the same period, the price of a Microsoft stock option went from $3,500 to $12,900. This means Microsoft's options would have given you a 270% return on investment instead! 

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If you had invested $21,700 in Microsoft stocks, your investment would have grown to $77,750 in just 12 months.

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Can you see why option investing can make a life-changing difference for you?

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Where Can I Use Options Investing?

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Take note that options investing can only be done on stock exchanges with a highly liquid options market. 

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In the US stock market, this is incredibly effective. Option use is also something you might think about doing in the European or Hong Kong markets, though there are some significant differences.

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Your best course of action if you're considering investing in options would be to speak with your broker. They will be able to provide you with information about whether options are available for you.

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It’s crucial to remember that options are considered leveraged financial instruments. You might be required to take a test to demonstrate that you have a fundamental understanding of options, depending on the country you are from.

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Bottom Line

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Once you’re able to understand the basic concepts of options, it will eventually become easier for you to execute and seize opportunities. It may allow you to enjoy higher returns on your portfolio and elevate your wealth-building strategies with the same capital amount. But as with any investment, there are risks and regulations involved. 

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Disclaimer:

This article is for informational purposes only. Do not consider any such information or other material as legal, tax, investment, financial, or other advice.