[quote=flu]
If one thinks the stock is going to rise, why not just buy the stock? What advantage does this put spread have over just buying?
[/quote]
Limit Risk OR ability to Leverage.
Understanding options is a completely different way of viewing the stock market.
Think of options as insurance. Anybody has the choice to be the insured party (pay the premium)
OR
be the insurance company (collect the premium)
AND you decide how long you want exposure.
when buying options, you can never lose more than what you pay for the option.
(Selling options has different risk)
On Thursday GLD (Gold ETF) $120 Calls for Friday expiration were about $1.00.(1 contract for $100) allowed you to benefit on the move for about 10 ounces of Gold.
Buying 10 ounces of gold was $12,600.
As it turns out, on Friday the move in gold meant that
the $1 option on Thursday was worth $6 on Friday.
($500 profit on $100 investment)
The $12,600 investment was worth about $13,200.
($600 profit on $12,600 investment)
If gold had dropped $60, you would have lost $600 holding gold and only lost $100 if you had options.
Instead of selling covered calls, you can buy calls and sell calls against them to create almost as much income
with less risk.
Many 401K plans do not allow you to short the market, so options can be used to benefit/offset from a downturn.
Buying calls does not allow you to collect dividends vs. if you owned the stock.
When selling calls on a dividend paying stock, you run the risk of having the option exercised early and you can be responsible for paying the dividend although you are not collecting the dividend.
Understanding the risks, it’s possible to make money from the stock market without ever actually owning any stock.
Also, an easy way to control hundreds of ounces of gold, silver etc with limited downside risk and unlimited upside risk.
Options are much less risky than stocks when understood.
