Answer For Leverage & Improved ROI (Return on Investment) If you acquire a thousand shares of xyz stock investing at $20.00, it would cost you $20,000 ($twenty x one thousand shares). If you trade a January option on a thousand shares of xyz stock and the choice is buying and selling at $one.50, it would price you ($1.50 x 10 contracts x 100 shares) $1,500. Each option agreement has one hundred shares. It would be $eighteen,five hundred less costly than buying the stock! You have $18,500 to spend in other stocks or possibilities. The purpose to trade alternatives is leverage. You can leverage your cash to make a larger return on your expense (ROI). Rather of placing all your eggs in a person basket, you can disperse the chance between several investments. If xyz stock moves up $one.00, you manufactured $21.00 x a thousand $21,000 $20,000 first expense or $one,000. The ROI would be $a thousand revenue/ $twenty,000 expense five%. If the alternative moves $.fifty when the stock moves $one.00, you manufactured $.50 x10x100 $five hundred. The ROI would be $500 earnings/$1500 expense 33%. Most traders would prefer a 33% return above a 5% return. Leverage raises your ROI (return on investment). Leverage will allow you to spread the threat amongst several investments instead of pinning all your hopes on 1 investment. Options (puts and calls) enable you to pass on the risk more than several investments. You get calls when you consider the stock price will rise and you get puts when you consider the stock selling price will drop. Recall - Phone up, put down. You make income in a increasing or falling current market. If you want to get fancy and defend your placement, you can use an alternative buying and selling method by placing an choice pass on call or place order. You can purchase one side and provide the other side therefore reducing your expense. You are using other peoples dollars to leverage your expense. For instance, if the April 20 contact is trading for four.35 and the April 25 phone is investing for 2.26, you could get the April 20 simply call for four.35 and promote the April 25 phone for 2.26. Your expense would be four.35 debit 2.26 credit score 2.09 for each share. Every agreement has 100 shares, so ten contracts would be 1000 shares. $2.09 x ten contracts x 100 shares $ 2090. You control a thousand shares for $2090 not $twenty,000! It is pretty much 1/10 the cost. If you just bought the April 20 get in touch with it would price tag you $4.35 debit x 10 contracts x one hundred shares $4350 but by using an option spread you lowered your entry price tag and saved $2260 ($4350 - $2090)! In the stock current market today, alternatives are a useful resource for balancing your possibility. Option buying and selling is about using a lot less dollars to attain the exact same objective. Solution spreads are about employing significantly less cash and protecting your place.