Why People Trade Options Instead of Stocks — Part2

Yesterday we discussed the flexibility of making money on all 3 directional moves:-

1. UP
2. DOWN
3. FLAT

The 2nd reason why people trade options is because of Leverage. i.e. you can handle more share quantity with less money.

For example: HDFC Bank is trading at: Rs1450, to buy 550 shares you need to spend 550×1450 = Rs7,97,500

Whereas 1400 CALL Option is trading at Rs55, so you need to spend only 550×55 = Rs30,250

Here you need to spend only 3% of capital to handle the movement of 550 shares.

(However, You do not get a 1:1 correlation, the 1400 CALL option does not move Re1 when HDFCBANK goes up Re1 — it will only move as per its DELTA. If the delta is 0.6, then it moves up 60 paise for every Re1 move on the underlying. We will revisit DELTA on some other day)