Major Differences Between Stocks and Options


Options typically cost only a fraction of the stock price. If you think XYZ stock, currently at $49 per share, is going up in price, you can purchase 100 shares at a cost of $4,900. If instead you buy 1 call option contract (1 contract represents 100 shares of stock), you might pay only $2 per share for a total of only $200 to participate in an upward price movement of XYZ.

Analogously, if you think XYZ is going down in price, you could short 100 shares of stock, but that creates a margin responsibility in your brokerage account, which can become costly if XYZ goes up. If instead you buy one put contract, you might pay just $2 per share for a total of only $200 to participate in a downward ...

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