Should I Buy 100 Stocks or Buy a Call Option?

Buying calls and then selling or exercising them for a profit can be an excellent way to increase your portfolio's performance, and your risk isn't as big as stock buys.

Benefits of a Call Option

Investors often buy calls when they are bullish on a stock because it affords them leverage. Call options help reduce the maximum loss an investment may incur, unlike stocks, where the entire value of the investment may be lost if the stock price drops to zero.

I consider trading calls to be an effective way of increasing exposure to stocks or other securities without tying up many funds. Putting it simply, it's smaller but safer profits.

Example

Let’s say your wanted stock trades for $50. A one-month call option on the stock costs $3. Would you rather buy 100 shares of your stock for $5,000 or would you rather buy one call option for $300 ($3 x 100 shares), with the payoff being dependent on the stock's closing price one month from now?

As you can see, the payoff for each investment is different. While buying the stock will require an investment of $5,000, you can control an equal number of shares for just $300 by buying a call option. Also note that the breakeven price on the stock trade is $50 per share, while the breakeven price on the option trade is $53 per share (not factoring in commissions or fees).

The Risk Rate

The biggest potential loss on the option is $300, the loss on the stock purchase can be the entire $5,000 initial investment, should the share price plummet to zero.

Conclusion

There is no incorrect choice here. It truly boils down to your knowledge, your confidence thereof, and how much risk you're willing to take.