Hello! Investors.

Today we will discuss the comparison between risk and return profile of equities versus options. when we buy equity, we need to pay the full amount of the value of the equity while when we buy options, we need to pay a premium only. So, because of the investment of full amount versus premium, the risk on return profile of the asset differs.

Returns in Options

For example, suppose nifty is running at 14000 currently and the 14000 call option is running at Rs. 300.

So, if we buy nifty at Rs.14000, our investment will be Rs.14000. If nifty moves up by 1400 points and closes at 15400 on expiry, we will earn Rs. 1400. That means we will have 10% returns on investment.

On other hand, if we purchase 14000 Call Options at Rs. 300. Our investment will be Rs.300 Only. If the market moves up and closes on expiry at 15400, the settlement value of the call option will be Rs. 1400. Hence, our profit in Call Option will be Rs. 1100. That means we will have a 367% profit in call Option.

Risk in Options

In the same above example, if we buy Nifty at Rs.14000 and market falls by 1400 points and closes at 12600, we will lose Rs. 1400 in our equity i.e., 10% of the investment. At the same time, we will lose 100% amount invested in Call Option and that is our maximum loss. In this example, we will have a loss of Rs. 300 in Call Options.

This proves that options are having a high risk and high return profile. That means if someone wants to earn good money with low investment, at the time he can choose option buying strategies.

One more thing, if we do not want to take the risk of a full 100% investment then we can hedge these options with another option. We can convert the plain vanilla call buying strategy to bull call spread, bull put spread, bear call spread, or bear put spread in such a way so that our investment should not be sunk at the end of the month. So, if you want to take less risk then we should convert the plain vanilla options to option strategies.

Thank you. Happy Investing.