Can you still control more shares of stocks by trading options with NO margin leverage?
I want to know if it is possible to still control more shares of stocks by trading options using no margin leverage? Please give a good understandable answer.
Related posts:
- Options Trading – Benefits of Leverage
- SRS,Margin,Delivery options during online share trading?
- Does anybody know of any good stocks to buy right now that I could use Options trading on?
- Trader Chat: Dan Passarelli Pt. 1 – Options Education, Trading, Risk, & Leverage
- When the financial crisis crosses over, will there be plenty opportunities to make money via options trading?
March 8th, 2010 at 6:43 am
I do believe that you can but there is extreme risk in doing so. Remember that option are for a set time period after which they become worthless. But during that time period with a given amount of capital you certainly can control more shares than with buying the shares directly even with margin. The shorter the time period until expiration the more you can control with a fixed amount of capital. One example should suffice.
IBM $109 a share. June 110 options 1.00 a share. 109 times as many. They do expire in a few days though but hey. If the stock goes to $112 you doubled your money. Not impossible but not too likely either.
March 8th, 2010 at 7:04 am
You don’t need margin to buy/sell options. You can do it in a cash-only account (which is how I do it). Margin just means borrowing the broker’s money to buy stock/bonds/options instead of using your own cash. If you want to sell short, then you need a margin account regardless of what you’re selling.
Example: Apple Computer is around $140 stock. For 100 shares you would need $14,000 in cash. Now, if the December $140 options are selling for $70, you can buy 200 options (2 lots) for $14,000. You’ve essentially double the number of shares you “control”.
Other stocks may have much bigger spreads, but will be much more risky – so something that allows you to control 10 times the number of shares will be much riskier than something that allows you to control 2 times. But it can be done in a cash account just fine.
March 8th, 2010 at 8:00 am
Options give the the ability to control large amounts of shares with minimal capital, at a known risk level.
If you buy a call or a put option your risk is limited to the amount that you have paid for these options. Your control of the shares is limited to the amount of time you have paid for: ie: 3 months, 6 months, etc..
If you buy shares on margin [ie: borrowing a %] & the price moves against you, you can loose more than you have invested.
For example:
If you want to buy 1000 shares of ABC, currently trading at $10
You think the price will go up by 20% over the next 6 months
You could buy 10 6 month $11 call options. If they cost 10c per share. It would cost you:
1 contact [100 x 10c] = $10 so 10 contacts = $100
So your total risk & outgoings would be $100.
Buying on margin – assuming that you have a 50% margin.
Total cost of shares = 1000 x $10 = $10,000
- You would borrow on margin $5000
- You would pay upfront $5000
When you sell the shares you need to pay back the $5000 you have borrows plus any interest. If the shares go below $5 you would have lost all of your $5000 plus some interest as well.
So buying options are great for risk management, but can expire worthless.
I help run this site which you might find useful.
http://www.thedailytradingreport.com
March 8th, 2010 at 8:55 am
yes, because option contracts are cheaper than stock price, so we can control more shares.