Options Trading Benefit #1 – Minimum Capital

Benefit #1 – Trade with Minimum Capital

As a buyer of a call option, you have the right to purchase 100 shares of an underlying (stock or ETF) at a predetermined price (strike price) anytime before expiration – the date on which the option contract expires.

So what does this mean?? - Let’s say you purchase one call option for AAPL at a strike price of 180 that expires in 2 months for a debit of $1.60 when AAPL is trading at $172.  **It will cost you $160 to buy the call option since the quoted ask price ($1.60) must be multiplied by 100 to obtain the total debit.  This is done because each contract allows you to control 100 shares.

You have just bought the right to purchase 100 shares of AAPL at $180 before expiration occurs in 2 months!!  Within two months, if AAPL is trading at $190, your 180 call option is worth $10, which represents a gain of $1000.  The total capital required to do this trade with a call option is only $160, whereas it would have cost $17,200 ($172/share *100 shares) if you would have bought 100 shares of AAPL outright!!

By buying a call option, you are now able to control 100 shares of AAPL at a fraction of the cost for the next two months.

Continue reading about the additional benefits of options trading.