How does leverage fit in with option trading? - ProProfs Discuss
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How does leverage fit in with option trading?

Asked by Lucas, Last updated: Aug 27, 2021

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LiamGleason

LiamGleason

LiamGleason
Often options trading investors begin simply buying calls and puts to get leverage a market timing decision in order to generate profit. Financial leverage is considered as the most beneficial rewards of options trading. Leverage usually has a potential to make big gains by just using a small capital.
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John Smith

John Smith

John Smith
John Smith

Answered Sep 08, 2016

There are two ways to look at leverage when talking about options:1. since option price movements, particularly when options are in-the-money, aredependent for the most part of the underlying stock price movement, the move in anoption price is considerably magnified.example: stock xyz currently sells for $52 and a november $50 call option currentlysells for $4.50. lets say the following day the price of xyz stock moves from $52 to$55 (an increase of approximately 5.8%). the option would likely be selling for $7.50(an increase of 66% in the options price).by purchasing the options rather than the actual shares, the effects on the moneyinvested are magnified considerably.2. for very little money, you can control a large asset. for example, if 100 xyzcommon stock costs $52 per share (total value of $5,200), you can, in a sense, havecontrol over those shares for as little as $450 (option price of $4.50 x 100 shares).
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