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Leverage
Options and futures are known as leveraged investments. This basically means that the effect of price changes in the underlying security is magnified. If a $50 stock quickly rises 5 points, stockholders make 10%. But since options on that stock trade for much less than the price, options holders may make 100%, or even more. A short-term call option to purchase the stock at $50 is likely to be trading for $2-3 before the price jump, when the stock is at $50. When the stock moves to $55, the option now has $5 of intrinsic value. So it is likely to move up to $7-8, giving investors a 200-300% profit. |
