
Directional View on Trading Long Call Options Position
So say if you are thinking that Microsoft will go up from it current price of $25 to $40 in 2 months time and you have $1000 as capital to trade. So you have two choices:1) Buy Microsoft Stock : So you buy 40 shares of microsoft at the price of $25 and if after 2 months your prediction comes true, then the price will reach $40 and you will get profit of $15 per share i.e. $600 as profit. So in terms of percentage, your profit on your invested amount of $1000 is $600, i.e. 60%
2) Buy Call Option on Microsoft: Suppose that the Long Call Option on Microsoft at a strike price of $25 is available at a premium or price of $2 and it is being traded in lots of 100 shares. So, each lot will cost you $200. Since you have $1000, you can buy 5 lots, or 500 Options on Microsoft.
Now if your prediction comes true in 2 months and price actually reaches $40, the return to you will be $15 per option. Since you bought 500 options, you will get 500 * $15 = $7500
In terms of percentage gains, on your invested amount of $1000, you got $7500, so percentage profit is a whooping 650%
So, compare the above two choices. When you buy stocks, you get only 60% profit. When trading Options, your profit is 650% on the same price movements. But you should not forget the risk involved. The risk is worst in second option.
In case of Buying Stock, if the price of the underlying microsoft stock does not go above $25 or comes down to $15, you just loose $10 per share. Moreover, in case of stock, you can still hold the stock till infinite period of time and wait for it to recover. So there is a lot of time available for you to let the stock price move.
But in case of Trading Options, there is limited time (only till expiry). The moment the option expires, the bet ends. What if the price of Microsoft does not move beyond $25 or comes down to $20, $15 or $10. In that case, the options you bought will be worthless. And that means all the money ($1000) you spent on buying options is worthless. Hence, the loss is 100%. Therefore, analyse your position, your capital requirements, your risk taking abilities quite well, before jumping onto options trading. Remember, Options Trading or Futures Trading has an expiry date  you win or you loose
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