When is buying calls better than buying shares?

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IronFist

Let's say I'm bullish on a stock like 2 years from now. While I figure out how much money I'd spend if I were to spend a certain amount on shares or that same amount on options, and then do Think or Swim's calculator to see the profit between now and then, if buying the options becomes more profitable than the shares, does that mean buying the options is better?

So basically this plausibly happens when a stock has been pretty stable for awhile right? Since premiums go decreased then (I think).

Ok for example. Let's say I want to buy MNMD which is currently trading at $1.12. Let's say I have $500. So this would buy me 446 shares.

This means if MNMD goes to $2 I make $392.

If MNMD goes to 4 I make $1,284.

If MNMD goes to 4.65 I make $1,574

But let's say instead I buy Jan 24 $2.50 call options. Currently they are $.56. This means I could buy approximately 8 for the same amount of money. This means my break even is $3.06.

According to ThinkorSwim, if it goes to $4.65 by Jan 24, I will have $1,590.

So does this mean buying options is potentially more profitable (as long as value above some point) on a certain date?
 
if you have only a limited amount of money and want to go all-in, and want to maximize your profit on a stock you're absolutely sure will either rocket higher or crash lower, it makes sense to buy options because they offer leverage - typically 1 option gives the right to purchase or sell 100 of the underlying. if you ignore the time premium, each $1 move above or below the strike is worth $100/contract.

edit: before buying an option, i like to check the return calculator here:

https://www.optionsprofitcalculator.com/calculator/long-put.html
 
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As an options buyer, I think the longer the time frame, the better for options buyers as the chances of your option being profitable increases. For the shorter time frame of 1-2 months, my win rate was like 30-40% of all my trades, with 3/1 average gain to average loss ratio. I have started to move my expiration dates further out but, I do not have figures on how it will affect profitability as of now. By December 2022, I should have a better idea if the extra time will increase my win rate and returns.
 
Options are riskier than outright stock. Just imagine you are wrong and stock only doubles to $2.50 by Jan 2024. By owning stock, you still have the value of money in shares and have actually doubled your investment. On the other hand if you bought call options expiring in Jan 2024 and price is only $2.50 at expiry, you have nothing plus you lost your investment.

Options are usually good if you know how to time the market (like sex, most men overrate their skills). As a beginner (you) I'd suggest you're better off using $500 to buy shares @$1.12 and selling Jan 2024 call options @ $0.56. That way you can get almost 1000 shares at a net cost of just $0.56. And if you're right and stock goes to $2.50 or higher you'll make 4x(plus) your money. The good thing is if you're wrong and stock doesn't move much, you won't lose your money and actually make some profit from option time value decay.
 
Don’t forget about Volatility!
If the underlying doesn’t move in your favor before expiration you can exercise it, hold the stock till it rises. Kinda like a second chance.
 
Hmmmm..Not really...What about a stock that goes up 3 percent a day,every day for 30 days...Thats low RV,but a thing of beauty if you are a call buyer playing direction

Delta hedging is another story,and you are basically correct in that approach...



longandshort said:
Use an option to make a bet when you think realized vol will be greater than implied vol.
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Buying options is less risky than stocks. Why? Think about it. My risk buying say a call option is limited to the cost of the premium. If I buy a call option, 3 months out that cost me $500.00. That is the most I can lose in a worst case scenario. You buy 100 shares of a $50 stock and you have $5,000 at risk. Even with a stop loss, you can lose a substantial amount if the stock gaps down suddenly. If it drops to $40, you have lost $1,000. Also, I can exit my option trade way before I lose the $500.00. Say it drops to $250.00, I can sell it and limit my loss to only $250.00. With the leverage, my upside is theoretically, unlimited. With stocks, your upside depends on how many points your stock goes up and you sell it. So, my $500.00 can easily go up to $1,000, $2,000 or $3,000 with a strong move in the stock in my favor. I accept the 30-40% win rate with a 3/1 average gain to average loss ratio.
 
It you spend equal dollars on options vs stock,your option bet is massively leveraged..Your PnL will have huge swings and most likely get wiped out or shaken out,whichever comes first...

Think it thru..

Why trade equal dollars vs equal delta???

If you still feel equal dollars is the way to go,what money management rules/ stops should you employ??

Equal dollar bet is either a punt,or a highly leveraged bet that needs strict MM to control the volatility you will encounter


IronFist said:
Let's say I'm bullish on a stock like 2 years from now. While I figure out how much money I'd spend if I were to spend a certain amount on shares or that same amount on options, and then do Think or Swim's calculator to see the profit between now and then, if buying the options becomes more profitable than the shares, does that mean buying the options is better?

So basically this plausibly happens when a stock has been pretty stable for awhile right? Since premiums go decreased then (I think).

Ok for example. Let's say I want to buy MNMD which is currently trading at $1.12. Let's say I have $500. So this would buy me 446 shares.

This means if MNMD goes to $2 I make $392.

If MNMD goes to 4 I make $1,284.

If MNMD goes to 4.65 I make $1,574

But let's say instead I buy Jan 24 $2.50 call options. Currently they are $.56. This means I could buy approximately 8 for the same amount of money. This means my break even is $3.06.

According to ThinkorSwim, if it goes to $4.65 by Jan 24, I will have $1,590.

So does this mean buying options is potentially more profitable (as long as value above some point) on a certain date?
More...
 
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