Stock vs Options Example

MSFT closed at $123.37 on the Easter holiday shortened weekend 4/18/19 close.

Suppose you bought 100 shares for $100 a share on 1/4/2019 and sold them on 4/18/19, a perfect trade indeed.

buy at $100
sell at $123.37
profit = $23.37 per share!

Now here are three MSFT options trades as of 1/4/2019 that expire on April 18, 2019:

The out-of-the-money $110 call:

buy at $3.35
sell at $13.37
profit=$10.02
or, you need 2.3 calls costing a total of $7.70 to equal the same profit as the stock.

The at-the-money $100 call:

buy at $7.925
sell at $23.37
profit = $15.425
or you need 1.51 calls for $11.96 to equal the same profit

and finally, the in-the money $90 call:

buy at $14.75
sell at $33.37
profit = $18.62
or you need 1.25 calls for $18.43 to equal the same profit.

Now this assumes perfect timing, perfect pricing and perfect quantities which of course doesn't happen. If you sold earlier your gains would be less. If you held on, your options would expire at the current stock price. Either way, you cannot buy option fractions, so there.

The problem with options for portfolio maximizers is that for a given stock move options leave money on the table. The problems are both the options delta and the extrinsic/time value or "juice". Option buyers must overcome the small participation from low deltas AND must burn off all of the extrinsic value before receiving any of the stock's gain.

If you want a high delta, the .78 delta 90 calls have huge $2.82 juice. Low juice $120 calls cost $1.095, all extrinsic value.

In theory if you are good enough you can get the same move as the stock but you need guesswork. Spend $10.05 for three 110 calls, $15.85 for two $100 calls or $29.50 for two $90 calls will get you your $23.37. All of the above beat the $100 spend for a share of MSFT.

Feel free to post comments.

Disclaimer: Posts are for education only and not investment advice, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.