Well, let's start with returns. Financial returns can be so much more rewarding with options. Take the example below, for the time being assuming there's no commission charges.
Stock ABC is valued at $50 and you invest $1000, therefore 20 shares. The next day it reaches $51 and you cash out. Your profit is only $20, or 2%.
$51 - $50 = $1
$1 x 20 shares = $20
$20 / $1000 = 2%
Now, let's say you bought the option for ABC, call it .ABCKL, for $5 per contract, and you invested $1000, so 200 options. Say the delta is .99. If ABC went up $1 the next day, .ABCKL would be worth $5.99 per option, a return of about 20%.
$5.99 - $5.00 = $.99
$.99 x 200 options = $198
$198 / $1000 = 19.8%
So which would you rather have: 2% or a whopping 20%? And think about this as well: ABC only went up $1 in one day, not unreasonable. But by buying the option instead of the stock, you would have returned 20% in just one day because the stock went up only $1!! Many investors don't even return 20% in one year!
Leverage
Using the example above, $1000 would only be able to buy you 20 shares of a stock that's modestly priced, whereas you could've bought 200 contracts for the associated option. Needless to say, $20 won't take you far in the stock market. And although we're assuming no commission, returning $20 wouldn't cover the commission for many online brokers in real trading. By contrast, a $198 gain for trading options is pretty good, well more than enough to cover any commission charges. Depending on the price of the options you buy, it is very reasonable to start trading options with as little as $200 or $300.
Could you lose more by trading options?
Of course. Options have far more volatility than stocks. In addition, if you let an option expire it becomes worthless, so you would have lost everything you invested. Just like anything, due diligence is required. The thing to note is that returns can be much more if you trade options. If you're making money trading stocks, then you probably could've made a lot more trading the options of those stocks instead. If you're uncomfortable with stocks, then maybe options aren't for you. As noted on this site, no buy, sell, or hold recommendations are being offered. This site is intended as an information resource.
Trading Tips
No buy, sell, or hold recommendations are offered here. If you want tips, you should consult an investment professional or any other resources you have used to trade stocks and see if the options for the stocks would be good investments for you.
As general advice, there are many people offering trading tips. There are a lot of talking heads out there. You should invest in a manner that suits your trading style and goals. What works for others may not work for you, and vice versa. It's a good idea to find your own niche.
Do all stocks have options?
No. Options tend to only be available to large, established, blue-chip companies and maybe for some smaller ones. Penny stocks, for the most part, have no options. Check out sites such as the Chicago Board Options Exchange or optionsXpress to see if certain stocks have associated options. There are about 3,000 to 4,000 optionable stocks in U.S. markets.
How much money can you make by trading options?
Just like trading anything else, you need to be realistic with your goals. Moreover, returns will vary from investor to investor. You will probably not become a millionaire overnight by trading options. The returns, though, can be significantly higher than if you were trading stocks. It is not uncommon for some option investments to return 300% in one trading day. They sometimes return as much as 500%!! Be aware that it's impractical to expect this frequently, much less everyday. It should give you an idea, however, of how much you can really make. As opposed to annual returns of 10% to 15% offered by stocks or mutual funds, you can reasonably expect to get three-digit returns on options year after year if you are a good investor.
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