Although Apple Inc. (AAPL) is much cheaper to purchase now then it was before the split, it is still rather pricey. You believe that this stock, despite its high price, continues to have tremendous upside potential and could easily make it to $150 soon. The problem is that you don’t want to shell out $130 for one share of the technology giant. What can you do to maximize your money and cash in on the perceived upside? Easy, buy a call option rather than the stock.
A call option is a bullish strategy wherein a trader purchases the right (but not the obligation) to purchase a stock at a specified price within a specific time period. One advantage to buying a call option rather than purchasing a stock is that you can gain a much larger percentage return on your investment. To learn more advantages, please check out the Options Education section on our website.
If you want to purchase 100 shares of AAPL stock at $130 it is going to cost you (100 X $130) $13,000. However, let’s say that you decide to purchase 1 call option on AAPL (each option represents 100 shares) with a strike price of, say, 120 with a July expiration (gives the buyer the right to purchase 100 shares for $120 a share), which carries a price tag of $11. Rather than dishing out $13,000 for 100 AAPL stock shares, you instead pay $1,100 for the options – a rather nice difference of $11,900 that you can use for something else or to purchase other options.
The cost efficiency of purchasing call options can be far greater than simply purchasing shares of a stock, especially when you are dealing with high-priced stocks like AAPL. Remember that one option contract is the right to purchase 100 shares of a stock at that price. So, rather than purchasing 100 AAPL shares at $130 at the massive cost of $13,000; you have dished out a more reasonable $1,100 for the transaction. Of course this is the scenario if you want to be simply bullish on AAPL stock.
As you can see, it is possible to lay out far less money to purchase call options on a stock that to by the call itself. In fact, the earlier the expiration you choose, the lower the price you could pay. No matter what math you use, paying $1,100 is far better than paying $13,000 for the same product. What if you want to sell these options to someone who is willing to pay a higher ask price than you paid? That is another subject for another time. Remember, there is no fool-proof way to make money in the market – there is risk involved in any trading strategy. One way to make sure you maximize your cash is to make sure you study your subject, remember that knowledge is power.
Senior Options Instructor