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Have you ever wondered why so many traders seem obsessed with options? I’ve been hearing this question from my readers a lot lately “Do options make more than stocks?” Well, I decided to dive deep into this topic today and what I found might surprise you!
Options trading has this reputation for being a get-rich-quick scheme, but is that really the case? Let’s break down the real deal about options vs stocks and see if they really do offer better profit potential.
What Are We Even Talking About?
Before I get into the nitty-gritty, let’s make sure we’re on the same page. When we talk about options making more money than stocks, we’re comparing two different investment strategies:
- Buying stocks directly – Simply purchasing shares of a company
- Trading options – Buying contracts that give you the right (but not obligation) to buy or sell stocks at specified prices
Now, I was reading through this great discussion on Stack Exchange where someone asked exactly this question, and I think the explanations there really clarified things for me.
The Basic Example That Confused Everyone
Let me share the example that was confusing the original poster on Stack Exchange
Imagine a stock (let’s call it GME) trading at $10 You have two choices
Option 1: Buy the stock directly for $10
Option 2: Buy a call option for $2 that gives you the right to buy the stock at $10
If the stock price rises to $20:
- With the stock, you make $10 profit ($20 – $10)
- With the option, you exercise at $10, pay $2 for the option, so your profit is $8 ($20 – $10 – $2)
So wait… doesn’t that mean the stock made MORE money? Yes and no. This is where things get interesting!
The Leverage Factor That Changes Everything
The real magic of options is something called leverage. With options, you’re controlling the same amount of stock with much less capital.
Here’s how it works in practice. Let’s say you have $100 to invest:
Scenario 1: Stock Goes Up
Stock approach: Buy 10 shares at $10 each. Stock rises to $15.
- Investment: $100
- Result: Sell for $150
- Profit: $50 (50% return)
Options approach: Buy options for 50 shares at $2 each. Stock rises to $15.
- Investment: $100
- Result: Options now worth about $200-$250
- Profit: $100-$150 (100-150% return)
See the difference? Your percentage return is much higher with options!
Scenario 2: Stock Goes Down
Stock approach: Buy 10 shares at $10 each. Stock drops to $5.
- Investment: $100
- Result: Sell for $50
- Loss: $50 (50% loss)
Options approach: Buy options for 50 shares at $2 each. Stock drops to $5.
- Investment: $100
- Result: Options likely worthless
- Loss: $100 (100% loss)
And that’s the flip side – options can amplify losses too.
The Real Reason Options Can Make More Money
I think what confuses most people is looking at the profit on a single contract vs a single share. The better comparison is what happens when you invest the SAME AMOUNT of money in each.
Let’s break it down again:
If you have $1,000 to invest:
- You could buy 100 shares at $10 = $1,000
- Or you could buy 500 option contracts at $2 each = $1,000
Now if the stock rises to $20:
- Shares: $2,000 value – $1,000 cost = $1,000 profit (100% return)
- Options: You control 500 shares, each option gives you $8 profit = $4,000 profit (400% return)
THAT’S the real reason options can make more money – it’s all about the leverage!
You Don’t Need to Exercise Options to Profit
Another thing that often gets overlooked is that you don’t actually need to exercise options to make money from them. Most options traders simply sell the options contract itself when it increases in value.
When a stock price rises, the option’s value typically rises more on a percentage basis. So in our example, if the stock rises from $10 to $20, that call option might go from $2 to $11 or more. You can simply sell the option and pocket the difference!
The Risk-Reward Tradeoff
But before you go emptying your bank account to buy options, there’s a HUGE catch: risk.
Options have these critical differences from stocks:
- They expire (unlike stocks which you can hold forever)
- They can become completely worthless (100% loss)
- They’re affected by time decay (losing value as expiration approaches)
- They’re impacted by volatility changes
This creates a very different risk profile. With stocks, even if a company performs poorly, you’ll usually still have SOMETHING left. With options, you can lose every penny you invested if things don’t go your way.
When Options Really Shine
Options tend to perform best in these situations:
-
When you’re confident about short-term price movements – If you believe a stock will move significantly in a specific direction soon, options let you maximize your return on that conviction.
-
When you want to limit your downside risk – Despite what I said about total losses, options actually limit your risk to the premium paid. With stocks, theoretically, you could lose your entire investment.
-
When volatility increases – Option prices often increase during periods of high market volatility, even without significant price movements in the underlying stock.
-
For hedging other positions – Options can be used as insurance against losses in other investments.
A Real-World Look at Returns
Let’s put some realistic numbers to this. Here’s what typical returns might look like:
| Strategy | Average Annual Return | Max Potential Return | Risk Level |
|---|---|---|---|
| Buy & Hold Stocks | 7-10% | Unlimited | Medium |
| Options Trading | -100% to +1000%+ | +1000%+ | Very High |
Yup, the average return for options traders is often negative! That’s because most people don’t fully understand what they’re doing, and time decay works against them.
My Personal Experience
I’ve tried both strategies, and I gotta be honest – options trading isn’t for the faint of heart. I’ve had trades where I made 300% in a week, and others where I lost everything I put in. Stocks have been much more consistent for me, even if the returns are lower.
Here’s what I’ve learned:
- Options require much more active management
- You need to be right about direction AND timing
- The emotional rollercoaster is intense
- Knowledge of “the Greeks” (delta, theta, etc.) is essential
So Do Options Make More Than Stocks?
The answer is: it depends, but potentially yes.
Options CAN make significantly more money than stocks when:
- You’re right about the direction of the stock
- You’re right about the timing
- You understand how to manage the position
- You’re willing to accept the much higher risk
But the flip side is they can also lose money much faster than stocks. The stats show that most options expire worthless, meaning most options buyers lose money.
Who Should Consider Options?
Options trading might be for you if:
- You have a higher risk tolerance
- You can dedicate time to actively manage positions
- You’re willing to learn the complexities
- You have money you can afford to lose
- You want to hedge other positions
If you’re just starting out, or you prefer a “set it and forget it” approach, stocks are probably the better choice.
Getting Started With Options Safely
If you’re still interested in options after all that, here’s how to dip your toe in without getting destroyed:
- Paper trade first – Practice with fake money until you understand how options behave
- Start with simple strategies – Long calls or puts are easiest to understand
- Use small position sizes – Never put more than 1-5% of your portfolio in a single options trade
- Consider longer-dated options – These reduce the impact of time decay
- Set strict loss limits – Decide in advance when you’ll exit a losing trade
The Bottom Line
Options definitely CAN make more money than stocks – sometimes dramatically more. The leverage they provide means your percentage returns can be much higher when you’re right. But that same leverage works against you when you’re wrong.
I think of it like this: Stocks are like driving a car, while options are like flying a helicopter. Sure, helicopters can get you there faster and go places cars can’t, but they’re also much harder to operate and crashes tend to be catastrophic!
For most people, a portfolio that’s mostly stocks with perhaps a small allocation to options (if you’re interested in them) is probably the most sensible approach.
What’s your experience been with options vs stocks? Have you tried either or both? I’d love to hear your stories in the comments!
Final Thoughts
Options trading isn’t a get-rich-quick scheme, despite what some internet gurus might tell you. It’s a sophisticated investment tool that requires knowledge, skill, and the right temperament.
Can options make more than stocks? Absolutely! But they can also lose more, and faster. The real question isn’t which makes more money in theory, but which approach aligns better with your financial goals, knowledge level, and risk tolerance.
Have you had any experience with options trading? Did you make more than with stocks? Share your stories below!
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- An option is a side bet among traders over what the price of a stock will be at a certain time.
- With stocks, you take an ownership stake in the company.
- Your risk tolerance, level of experience and investing goals play a big role in deciding which one is best for you.
Options and stocks are two ways to put money to work in the market, but they offer sharply different profiles for risk and reward. Stocks offer high-risk, high-reward potential, while options take that a couple notches higher, with the possibility to double or triple your money (or more) at the risk of losing it all, often in the matter of a few weeks or months.
Here’s the story behind options and stocks, what they are and what kind of returns they can offer. Plus, we’ll look at a way to invest in stocks that has the potential to raise your return while reducing your risk.
When stocks are better
- You have at least some experience investing in the market, preferably a lot. Stocks require analysis and work, but options require even more. ETFs or mutual funds composed of stocks are better choices for beginning and even intermediate investors.
- You want to invest for the long term. Stocks can go up a lot over the long term, but sometimes you have to ride out downturns, and the short-term nature of options means an option can expire before the stock price moves in a favorable direction.
- You don’t want to follow the market super closely. While stocks require you to monitor them at least some of the time, it can be much less than the amount required by options, which expire on a fixed schedule.
- The stock is volatile. If you believe in a stock long term but it’s volatile, options prices will be high and it’s easy for options to expire worthless. Stock gives you a permanent stake, but you’ll have to ride out the ups and downs, and you can’t do that with options.
Why You Will (Probably) Lose Money Trading Options
FAQ
What is the 7% rule in stock trading?
Can I make $1000 per day from trading?
In Conclusion:
By strategy, discipline, and patience, an income of 1,000 rupees per day from the share market is possible. Don’t trade on emotions, stick to your trading plan and utilize stop-losses. Stay current, you will over trade against yourself. Start small, learn from experience, refine techniques for beginners.
What is the 60/40 rule for options?
Non-equity options taxation
60% of the gain or loss is taxed at the long-term capital tax rates. 40% of the gain or loss is taxed at the short-term capital tax rates.
Does Warren Buffett use options?