Should I just invest in options and not buy the stocks? It seems to me that they are way cheaper than buying stocks. - Seedly
 

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Asked by Anonymous

Asked on 21 Apr 2019

Should I just invest in options and not buy the stocks? It seems to me that they are way cheaper than buying stocks.

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Jonathan Chia Guangrong
Jonathan Chia Guangrong, Fund Manager at JCG Fund
Level 8. Wizard
Answered on 21 Apr 2019

By investing in options I'd assume you are buying options. Yes it's cheaper than stocks but you will only make money if you are absolutely, 100% sure about the direction the stock will take by the time it's near the option expiry. Do note that option premiums decay due to the time value and it will lower the value of your positions every moment you are not right. 80% of options expire worthless so you need to factor this as well.

Consider selling options instead for more consistent returns. Best to find someone to teach you this as there can be unlimited liability involved if you don't know what you are doing

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Yeo Enk Loui
Yeo Enk Loui
Level 6. Master
Answered on 21 Apr 2019

Like what Jonathan has mentioned, buying options are only profitable if you are 100% certain that the stock price will move in the direction that you bet (depending on whether you bought a call/put option).

Here's an example of payoffs assuming you bought 100 shares of IBM at 100 per share, compared to say 10 contracts of 100 shares of IBM call options. (at say $10/call which equates to a total expenditure of 10,000)

While buying options magnifies one's profits and could potentially be a better investment than just buying the underlying shares, you could potentially lose all your capital if your options expire worthless at maturity.

For a start, perhaps it is more advisable to purchase stocks instead of options!

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