When investors want to profit from a company’s stock swing, they typically only think of buying the underlying shares of stock and then hoping for their optimistic thesis to be proven right in the form of higher prices so that they can sell their shares at a profit and walk away a winner. There is, however, another way that traders often profit from their views on a stock, which is by utilizing leverage through another financial product.
These products are called stock options, and they not only provide the trader (buyer) leverage on the underlying stock’s position but also come at a cost. The cost of leverage comes through the timing exactitude needed to profit, meaning that these options will expire worthless unless the trader gets not only the direction but also the timing of the trade right. Knowing this, investors can assume traders are more convinced about a stock’s move when they buy these options.
