Options vs Stocks which is more profitable
Nearly 3 years ago, I wrote an article, Betting on Apple at 9 to 2 which described a bet in which a 35% move in the stock returned 354% on the option trade. Leverage works both ways, no move, or a slight move down, and the bet would have been lost. While I find this to be entertaining, I don't call it investing.  With $2-$3K, I recommend paper trading first, and if you enter option trades, no one trade should be more than 20% of this money. If you had $50K in betting money, no position over 10%. The first thing that I learned the hard way (by trying my hand at actual options trading) is that liquidity matters. So few people are interested in trading the same options that I am that it is easy to get stuck holding profitable contracts into expiration unless I offer to sell them for a lot less than they are worth.  I also learned that options are a kind of insurance,and no one makes money (in the long run) buying insurance.  So you can use options to hedge and thereby prevent losses, but you also blunt your gains.  Edit: IMO,options (in the long run) only make money for the brokers as you pay a commission both on the buy and on the sell. With my broker the commission on options is higher than the commission on stocks (or ETFs). "First, to mention one thing - better analysis calls for analyzing a range of outcomes, not just one; assigning a probability on each, and comparing the expected values. Then moderating the choice based on risk tolerance. But now, just look at the outcome or scenario of 3% and time frame of 2 days. Let's assume your investable capital is exactly $1000 (multiply everything by 5 for $5,000, etc.). A. Buy stock: the value goes to 103; your investment goes to $1030; net return is $30, minus let's say $20 commission (you should compare these between brokers; I use one that charges 9.99 plus a trivial government fee). B. Buy an call option at 100 for $0.40 per share, with an expiration 30 days away (December 23). This is a more complicated. To evaluate this, you need to estimate the movement of the value of a 100 call, $0 in and out of the money, 30 days remaining, to the value of a 100 call, $3 in the money, 28 days remaining. That movement will vary based on the volatility of the underlying stock, an advanced topic; but there are techniques to estimate that, which become simple to use after you get the hang of it. At any rate, let's say that the expected movement of the option price in this scenario is from $0.40 to $3.20. Since you bought 2500 share options for $1000, the gain would be 2500 times 2.8 = 7000. C. Buy an call option at 102 for $0.125 per share, with an expiration 30 days away (December 23). To evaluate this, you need to estimate the movement of the value of a 102 call, $2 out of the money, 30 days remaining, to the value of a 102 call, $1 in the money, 28 days remaining. That movement will vary based on the volatility of the underlying stock, an advanced topic; but there are techniques to estimate that, which become simple to use after you get the hang of it. At any rate, let's say that the expected movement of the option price in this scenario is from $0.125 to $ 1.50. Since you bought 8000 share options for $1000, the gain would be 8000 times 1.375 = 11000. D. Same thing but starting with a 98 call. E. Same thing but starting with a 101 call expiring 60 days out. F., ... Etc. - other option choices. Again, getting the numbers right for the above is an advanced topic, one reason why brokerages warn you that options are risky (if you do your math wrong, you can lose. Even doing that math right, with a bad outcome, loses). Anyway you need to ""score"" as many options as needed to find the optimal point. But back to the first paragraph, you should then run the whole analysis on a 2% gain. Or 5%. Or 5% in 4 days instead of 2 days. Do as many as are fruitful. Assess likelihoods. Then pull the trigger and buy it. Try these techniques in simulation before diving in! Please! One last point, you don't HAVE to understand how to evaluate projected option price movements if you have software that  does that for you. I'll punt on that process, except to mention it. Get the general idea? Edit P.S. I forgot to mention that brokers need love for handling Options too. Check those commission rates in your analysis as well." "More perspective on whether buying the stock (""going long"") or options are better. My other answer gave tantalizing results for the option route, even though I made up the numbers; but indeed, if you know EXACTLY when a move is going to happen, assuming a ""non-thin"" and orderly option market on a stock, then a call (or put) will almost of necessity produce exaggerated returns. There are still many, many catches (e.g. what if the move happens 2 days from now and the option expires in 1) so a universal pronouncement cannot be made of which is better. Consider this, though - reputedly, a huge number of airline stock options were traded in the week before 9/11/2001. Perversely, the ""investors"" (presumably with the foreknowledge of the events that would happen in the next couple of days) could score tremendous profits because they knew EXACTLY when a big stock price movement would happen, and knew with some certainty just what direction it would go :( It's probably going to be very rare that you know exactly when a security will move a substantial amount (3% is substantial) and exactly when it will happen, unless you trade on inside knowledge (which might lead to a prison sentence). AAR, I hope this provides some perspective on the magnitude of results above, and recognizing that such a fantastic outcome is rather unlikely :) Then consider Jack's answer above (his and all of them are good). In the LONG run - unless one has a price prediction gift smarter than the market at large, or has special knowledge - his insurance remark is apt." "As already noted, options contain inherent leverage (a multiplier on the profit or loss). The amount of ""leverage"" is dictated primarily by both the options strike relative to the current share price and the time remaining to expiration. Options are a far more difficult investment than stocks because they require that you are right on both the direction and the timing of the future price movement. With a stock, you could choose to buy and hold forever (Buffett style), and even if you are wrong for 5 years, your unrealized losses can suddenly become realized profits if the shares finally start to rise 6 years later. But with options, the profits and losses become very final very quickly. As a professional options trader, the single best piece of advice I can give to investors dabbling in options for the first time is to only purchase significantly ITM (in-the-money) options, for both calls and puts. Do a web search on ""in-the-money options"" to see what calls or puts qualify.  With ITM options, the leverage is still noticeably better than buying/selling the shares outright, but you have a much less chance of losing all your premium. Also, by being fairly deep in-the-money, you reduce the constant bleed in value as you wait for the expected move to happen (the market moves sideways more than people usually expect). Fairly- to deeply-ITM options are the ones that options market-makers like least to trade in, because they offer neither large nor ""easy"" premiums. And options market-makers make their living by selling options to retail investors and other people that want them like you, so connect the dots. By trading only ITM options until you become quite experienced, you are minimizing your chances of being the average sucker (all else equal). Some amateur options investors believe that similar benefits could be obtained by purchasing long-expiration options (like LEAPS for 1+ years) that are not ITM (like ATM or OTM options). The problem here is that your significant time value is bleeding away slowly every day you wait.  With an ITM option, your intrinsic value is not bleeding out at all. Only the relatively smaller time value of the option is at risk. Thus my recommendation to initially deal only in fairly- to deeply-ITM options with expirations of 1-4 months out, depending on how daring you wish to be with your move timing."
Stock B could be considered to be more risky because it seems to be more volatile - sharp rises on large volume increases can easily be followed by sharp drops or by further rises in the start of a new uptrend.  However, if both A and B are trading on low volume in general, they can both be more on the risky side due to having relatively low liquidity, especially if you buy a large order compared to the average daily volume. But just looking at the criteria you have included in your question is not enough to determine which stock is riskier than the other, and you should look at this criteria in combination with other indicators and information about each stock to obtain a more complete picture. Yes, from the point-of-view to the end speculator/investor in stocks, it is ludicrous to take on liabilities when you don't have to.  That's why single-stock options are far more liquid than single-stock futures. However, if you are a farmer with a huge mortgage depending upon the chaos of agricultural markets which are extremely volatile, a different structure might appeal to you.  You could long your inputs while shorting your outputs, locking in a profit.  That profit is probably lower than what one could expect over the long run without hedging, but it will surely be less volatile. Here's where the advantage of futures come in for that kind of structure: the margin on the longs and shorts can offset each other, forcing the farmer to have to put up much less of one's own money to hedge.  With options, this is not the case. Also, the gross margin between the inputs rarely fluctuate to an unmanageable degree, so if your shorts rise faster than your longs, you'll only have to post margin in the amount of the change in the net of the longs and shorts. This is why while options on commodities exist to satisfy speculators, futures are the most liquid. There is a reason why most professional option traders are sellers instead of buyers. Option sellers IMO are analogous to insurance companies that come out ahead in the long run. That is not to say if you are bullish about a stock then you should not buy it. I personally would never buy an option outright and look to reduce my cost basis by selling options around it such as: "At my soon to be legendary Stock Options Cafe, I recently wrote an article ""Betting On Apple at 9 to 2.""  It described a trade in which a 35% move in a stock over a fixed time (2 years) would result in a 354% gain in one's bet. In this case, the options serve to create remarkable leverage for speculators. In general, option help provide liquidity and extend the nature of the risk/reward curve.  There are option trades that range from conservative (e.g. a 'covered call') to wildly speculative, as the one I described above." Options are a derivative product, and in this case, derive their value from an underlying security, a traded stock. An option gives you the right, but not the obligation, to buy a stock at a given price (the strike price) by a given time (the expiration date.) What I just described is a call option. The opposite instrument is a put, giving you the right, but not the obligation, to sell the stock at a given price.  Volumes have been written on the subject, but I'd suggest that for a custodial Roth, I'd not activate the ability to trade options.  How to get started with options investing? offers a nice introduction to trading options. In my response, I offer an example of a trade that's actually less risky due to the option component. Have a read of this PF&M article, which @Blackjack has an excellent answer that speaks around risk. Answers which suggest that the return is proportional to the amount invested is a very simplistic argument. It is far more complex than that. I would content that your initial question Does investing more money into stocks increase chances of profit? is not the best question. The answer is it depends upon your investment methodology. The following will increase your chance of overall profit in the stock market The option is exercised. The option is converted into shares. That is an optional condition in closing that contract, hence why they are called options. "In futures, once you have established your position, you will earn or lose money depending on what the underlying does.  Theoretically, if you had no stop, you could lose far more than you invested.  An option will slowly lose all its value if the stock does not rise (assume it is out of the money when purchased).  Depending on the strike, it could rise substantially and you'd still lose all your money.  But you can't lose more than you put in.  So options have limited risk compared to futures, at the expense of a decaying ""time value"" that you will effectively be paying while holding the option." Thanks. Just to clarify I am looking for a more value-neutral answer in terms of things like Sharpe ratios. I think it's an oversimplification to say that on average you lose money because of put options - even if they expire uselessly 90% of the time, they still have some expected payoff that kicks in 10% of the time, and if the price is less than the expected payoff you will earn money in the long term by investing in put options (I am sure you know this as a PhD student I just wanted to get it out there.)I guess more formally my question would be are there studies on whether options prices correspond well to the diversification benefits they offer from an MPT point of view. yes, you are double counting. Your profit is between ($7.25 and $8) OR ($7.75 and $8.50). in other words, you bought the stock at $7.75 and sold at $8.00 and made $0.50 on top. Profit =  $8.00-$7.75+$0.50 (of course all this assumes that the stock is at or above $8.00 when the option expires. If it's below, then your profit = market price - $7.75 + $0.50 by the way the statement  won't call me away until the stock reaches $8.50 is wrong. They already paid $0.50 for the right to buy the stock at $8.00. If the stock is $8.01 on the day of expiration your options will be executed(automatically i believe). The issue with trading stocks vs. mutual funds (or ETFs) is all about risk. You trade Microsoft you now have a Stock Risk in your portfolio. It drops 5% you are down 5%. Instead if you want to buy Tech and you buy QQQ if MSFT fell 5% the QQQs would not be as impacted to the downside. So if you want to trade a mutual fund, but you want to be able to put in stop sell orders trade ETFs instead.   Considering mutual funds it is better to say Invest vs. Trade.  Since all fund families have different rules and once you sell (if you sell it early) you will pay a fee and will not be able to invest in that same fund for x number of days (30, 60...) It's unclear what you're asking. When I originally read your question, it seemed that you had closed out one options position and opened another. When I read your question the second time, it seemed that you were writing a second option while the first was still open. In the second case, you have one covered and one naked position. The covered call will expire worthless, the naked call will expire in the money. How your broker will resolve that is a question best left for them, but my expectation is that they will assign the non-worthless calls. Whereas, if both options expired in the money, you would be assigned and you would have to come up with the additional shares (and again, that depends on how your broker works). In general, for both cases, your net is the premiums you received, plus the difference between strike price and the price that you paid for the stock, minus any cost to close out the position. So whether you make a profit is very much dependent on how much you received for your premiums. Scenario #1: close first call, write second: Scenario #2: write covered + naked, one expires worthless Scenario #3: write covered + naked, both expire in the money Disclaimer: the SEC does not consider me a financial/investment advisor, so this is not financial/investment advice Depends on your contract, cash or shares delivered? If shares, then you get 5     BIG shares. Theres no longer any options. If you sell instantly, theoretically you will net the $10 difference + profit above strike. If cash, same thing just that you get cash $50 less strike.  Applies to cash and stock deals Options are binary, never pro-rated. if converted, basically you end up with BIG shares. An option, by definition, is a guess about the future value of the stock. If you guess too aggressively, you lose the purchase price of the option; if you guess too conservatively, you may not take the option or may not gain as much as you might have. You need to figure out what you expect to happen, and how confident you are about it, against the cost of taking the option -- and be reasonably confident that the change in the stock's value will be at least large enough to cover the cost of buying into the game. Opinion: Unless you're comfortable with expectation values and bell curves around them, it's significantly easier to lose money on options than to profit on them. And I'm not convinced that even statisticians can really do this well. I've always been told that the best use for options is hedging an investment you've already made; treating them as your primary bet is gambling, not investment. how much taxes would I pay on my income from the rent they would pay me? The same as on any other income. California doesn't have any special taxes for rental/passive income. Bothe CA and the Federal tax laws do have special treatment, but it is for losses from rental. Income is considered unearned regular income and is taxed at regular brackets. Would I be able to deduct the cost of the mortgage from the rental income? The cost of mortgage, yes. I.e.: the interest you pay. Similarly you can deduct any other expense needed to maintain the property. This is assuming you're renting it out at FMV. If not, would I pay the ordinary income tax on that income? In particular, would I pay CA income tax on it, even though the property would be in WA? Yes. Don't know how WA taxes rental income, but since you are a California tax resident - you will definitely be taxed by California on this, as part of your worldwide income.