Why Would You Buy an Option? 4 Compelling Reasons That Make Options Worth It

Options trading has exploded in popularity over recent years, and for good reason. Once considered too complex for average investors, options are now accessible tools that offer unique advantages for both beginners and experienced traders alike In 2023 alone, approximately 102 billion options contracts were traded – nearly double the volume from just five years earlier!

But why exactly would you buy an option instead of just purchasing stocks directly? Is it worth the learning curve? And can regular investors really benefit from these derivatives?

As someone who’s navigated the options market for years, I can tell you that options offer several compelling advantages that traditional stock investing simply can’t match Let’s break down the four main reasons why buying options might be exactly what your investment strategy needs.

1. Cost-Efficiency: More Bang for Your Buck

One of the most attractive features of options is their incredible leveraging power. Options let you control a large position with a fraction of the capital required to buy stocks outright.

Here’s a real-world example:
Imagine you want to invest in XYZ Corp because you believe its $131 stock price will rise over the next few months. Purchasing 200 shares would cost you $26,200 – that’s a significant amount of capital tied up in a single position.

Instead, you could purchase two August call option contracts with a $100 strike price for $34 each. Since each contract represents 100 shares, your total investment would be:

2 contracts × 100 shares/contract × $34 = $6,800

That’s a savings of $19,400 compared to buying the actual stock! This freed-up capital can be used for:

• Other investments to diversify your portfolio
• Earning interest in savings accounts
• Keeping as a cash reserve for other opportunities

This strategy, known as “stock replacement,” effectively lets you participate in the stock’s upward movement while committing significantly less capital. Your percentage returns can be much higher when the trade works out.

2. Less Risk (When Used Correctly)

Despite their “risky” reputation, options can actually reduce your overall investment risk when used properly. Unlike traditional stop-loss orders that might fail during extreme market volatility or overnight price gaps, options provide consistent protection.

Let me illustrate this with a scenario:

You purchase ABC Inc. stock at $50 and set a stop-loss order at $45 to limit potential losses to 10%. One night, devastating news breaks about the company’s CEO falsifying earnings reports and possibly embezzling funds. The next morning, the stock opens at $20, far below your stop-loss threshold.

Your stop order executes at $20 (the first trade below your limit), not at $45, resulting in a $30 loss per share—a 60% loss instead of your intended 10% maximum.

Had you bought a protective put option instead, your downside would be completely limited regardless of how far or how quickly the stock dropped. Options work 24/7, even when markets are closed, providing consistent protection against catastrophic losses.

Alternatively, if you had used a stock replacement strategy by purchasing a $45 call option for $6 instead of buying the stock directly, your maximum loss would be limited to just the $6 premium paid—no matter how far the stock price might fall.

3. Higher Potential Returns

The math here is simple: if you spend less money but make almost the same profit, your percentage return will be higher. That’s exactly what options offer when trades work out.

Looking back at our earlier example:

• Stock position: Buy at $50, stock rises to $55 = 10% return ($5 gain on $50 investment)
• Option position: Buy $45 call with 80 delta for $6, stock rises to $55 = 67% return ($4 gain on $6 investment)

The option’s delta of 80 means it captures 80% of the stock’s price movement ($4 of the $5 stock price increase). While the absolute dollar amount gained is slightly less, the percentage return is dramatically higher.

Of course, this advantage comes with a trade-off. When trades don’t work out, options can lose up to 100% of your investment. This is why proper position sizing and risk management are essential when trading options.

4. More Strategic Alternatives

Options unlock trading possibilities that simply aren’t available with stocks alone. They allow you to:

• Play the downside without shorting stocks: Many brokers charge high margin rates for shorting stocks, or don’t allow it at all. Options give every investor access to bearish strategies through put options.

• Profit from market stagnation: Most stocks don’t make significant moves most of the time. Options strategies like selling covered calls or iron condors let you generate income when stocks trade sideways.

• Trade volatility itself: Options allow you to capitalize on changes in market volatility, not just directional price moves. Strategies like straddles and strangles let you profit when markets become either more or less volatile.

• Create synthetic positions: Advanced options combinations can recreate the risk/reward profiles of other positions, giving you flexibility in how you structure your investments.

Options strategies can be tailored for virtually any market outlook:

• Bullish: Buy calls or sell puts
• Bearish: Buy puts or sell calls
• Neutral: Sell iron condors or butterfly spreads
• Volatile: Buy straddles or strangles
• Range-bound: Sell strangles or iron condors

This flexibility is simply impossible with traditional stock investing.

How to Start Trading Options With Your Broker

If I’ve convinced you that options might be worth adding to your investment toolkit, here’s how to get started:

1. Check your broker’s options approval: Most brokerages require specific approval for options trading based on your experience level.

2. Apply for options privileges: You’ll likely need to complete a questionnaire about your investment knowledge and financial situation. You might also need margin approval.

3. Study the basics: Take advantage of your broker’s educational resources or free online materials to understand options fundamentals.

4. Fund your account adequately: Ensure you have enough capital to purchase contracts and meet any margin requirements.

5. Start with the options chain: Use your broker’s platform to find options contracts on stocks you already understand well.

6. Begin with simple strategies: Start with basic options strategies before attempting more complex trades.

7. Monitor positions closely: Options require more active management than stocks due to time decay and other factors.

Beginner-Friendly Options Strategies

As a new options trader, these strategies offer the best balance of simplicity and risk management:

• Long calls: Buying calls when you expect a stock to rise
• Long puts: Buying puts when you expect a stock to fall
• Covered calls: Selling calls against stock you already own to generate income
• Cash-secured puts: Selling puts on stocks you want to own at a lower price
• Vertical spreads: Combining long and short options to limit risk and reduce cost

Common Pitfalls in Options Trading (And Why Most Fail)

Most people fail at options trading for a few key reasons:

• Insufficient education: Not understanding how options work, particularly how volatility affects pricing
• No trading plan: Entering trades without clear exit strategies for both winning and losing scenarios
• Poor risk management: Taking positions that are too large relative to account size
• Ignoring expiration dates: Failing to account for time decay, which accelerates as expiration approaches
• Overcomplicating strategies: Using complex strategies before mastering the basics

The Bottom Line: Are Options Right for You?

Options aren’t for everyone, but they offer unique advantages that make them worth considering for many investors. Their cost efficiency, risk management capabilities, enhanced return potential, and strategic flexibility can significantly expand your investing toolkit.

With online brokerages providing direct market access and low commission costs, retail investors now have unprecedented access to these powerful tools. The key is approaching options with proper education and respect for their complexity.

Whether you’re looking to hedge existing positions, generate additional income, or make more efficient directional bets, options offer solutions that traditional stock trading simply cannot match.

Remember though, like any powerful tool, options require proper training before use. Start small, focus on education, and gradually expand your strategies as your confidence and competence grow.

Have you tried options trading before? What strategies have worked best for your investment goals? I’d love to hear about your experiences in the comments below!