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Pratik Wagh
NDT Engineer passionate about Finance
Asked a question 3 months ago

I have a rookie question regarding Call Options. Why would someone prefer to buy the stock if we could buy the call option? Any video I should watch to understand this? Any article I must read? Thank you RV gang!

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Hi Pratik,

When you are buying an option you have to be right about the speed of the market and not just the direction. You can buy call 105 for 2$ that expires in 3 month, while the index is at 100 now.

If after 3 months the index is up at 106, you still lost money (call is worth 1$). However if after 1 week the index is at 101 you probably make money as the call will probably trade more than 2$.

On the other hand, options are great for capping and managing risks and improve your capital efficiency using leverage. 

For resources about options, see my previous answer here:

https://exchange.realvision.com/question/what-is-the-best-resource-for-me-to-learn-about-trading-options-5f23305c9e350c49daf663cd?answerId=5fa17eb3939ad86af56d668613

A good post about this subject is this one:

https://www.options-course.com/post/the-elegant-solution-for-risk-leverage-intc13

 

Cheers

Hi Pratik,

One simple reason - using my own market Australia as an example - is to get dividends.  You don't own the underlying if you only own the options so you won't get any dividend payments.  

YET - if you are using options to buy the underlying (shares/stocks for your example) - which is possible yet a bit messy - you miss out on all the potential gains as the stocks always have a delta of 1.  So what you might gain from some risk management with options, you lose in outright gains from price appreciation v if you just owned the stocks.  This is another legit reason.

There might be a few more.

Easy to find more detail reading something somewhere - there is heaps of information out there.  For a trusted source - for example (in Australia) I know the ASX (stock exchange for Australia) have options guides which would explain this and more.  You might find the same for your exchange/country.  

Cheers.

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