   2: Why are options safe? The answer is simple, really. Look at the two stock charts below, and tell me which one seems like the safer play.  Figure 1: Buy 100 shares of XYZ In the first graph, you purchase 100 shares of XYZ stock at $58 3/8. If the stock goes up, you make money. If the stock goes down, you lose money. Unlimited profit, and a maximum loss of $5,837.50.  Figure 2: Buy 1 NOV 60 CALL on XYZ In the second graph, you purchase 1 XYZ Call option instead, when the stock was at $58 3/8. You paid $4 for this option. If the stock goes up, you make money. Unlimited profit again, and a maximum loss of $400.
As you can see, for the price of the premium ($4), you can make the same profits on XYZ, but put a lot less capital at risk. It looks to me that the call option is the safer play in this instance. ©2001 xguru, Inc. A Cardinal Factor Company. All rights reserved. |
