# What is the benefit of buying stock options vs. purchasing stock? [closed]

I am aware that this is a simple question; but, given the scenario below, I have not found a satisfying answer while searching this site or Google.

My understanding

Stock options have been described as purchasing a contract that is valid for a limited time frame and gives you the 'option, but not the obligation' to purchase (or sell short) stocks.

These stock options typically have a 'contract fee' associated with them, such that a certain amount is gained by the broker, who earns profit from the contract.

Stocks are more simply purchasing (or selling short) the asset.

-But stock purchases can have a broker fee associated with them.

Confusion

If stocks don't have broker fees associated with buying or selling the stock (as I believe a standard ETrade account is), what is the point of getting a stock option, considering that anyone can purchase a stock at anytime - i.e. the "option, but not obligation" is useless, and only accrues additional fees for the contract?

The option is not completely "useless", the option gives you Gamma which the stock does not have. However it is true that you pay a price for this Gamma, which you can avoid by buying the stock directly. The Gamma does not come for free. So it boils down to whether you want Gamma or not.

The Gamma has a precise maths definition (which you need to learn) but is usually described informally as "downside protection", it is a bit like insurance against the stock going down below K (the strike price) by time T (the option maturity). Certainly buying Gamma can be inherently expensive, especially at times like these. It is like buying insurance in the middle of a series of earthquakes, when everyone wants it. In addition, even if Gamma is fairly priced, the transactions costs for options are high and raise the cost still further. You are right that it is the brokers and marketmakers who profit from these transactions costs (which gives them a (bad) reason for selling options to people who don't need downside protection or don't understand how it works).

First of all, options are derivatives whereas stocks are primary securities. The payout of an option is different to the payout of a stock. I suggest you google/learn what you are buying and how the instrument behaves.

The fee you are talking about has nothing to do with trading fees. The fee is for the luxury of having a choice of what to do. For example, let's say you buy an option for Google @ \$1400 which matures end of September. Let's say this option costs you \$50 and Google is trading at \$1300 now. Come September, if Google is trading at$1600, you can exercise your option which will be as though you bought google @ \$1400. If google is \$1000 in September, you don't lose anything (but the fee for the option).

It's just a different instrument. It behaves differently. Notice the difference if you buy an option and if you had bought google. If you had bought a share of google you would have either made $300 or lost \$300. Via an option, you either make \$150, or lose \$50. With an option, you can also put just \$50 to speculate on the price of a share trading at \$1400 so you have higher leverage. If you bought the option, you can sell it and just capture the profit, without ever having to buy a google share (for which you will need to have \$1600). So a \$50 allows you to capture the \$200 of upside (minus the fee of \$50).

With options, you can also construct various return profiles that you cannot with the stock alone. Mainly, with options you can capture a direction and limit the downside. For example a call allows you exposure to upside while limiting the loss.

This is a very unscientific answer. You should read up on options and how they behave. They are very useful if used correctly and allow you to construct various return profiles tailored to what you want to do.

• in either case there are fees to pay to the broker

• buying the option contract is much much cheaper than buying the actual equity share, as it is "just an option"

• it is meant to hedge, or speculate on a benefit from an upside in price over the short term, whilst an equity share is more for buy and hold purposes, dividends, etc.