Profit On Options Trading Vs. Stock Trading

The other day I came across a very cool blog called "Ryan Thomas: Baby Trader" that is written from the perspective of a toddler trading in the stock market. The kid knows what he's doing!

This last week he made a nice profit on some analysis and predictions of the securities he was following. He trades in stocks directly, rather than options, which made me wonder how much more would he have been able to profit if he had been trading in options.

Without going into to much detail here about how options work, I'll just say that they allow you a bit more leverage and control over stocks than when you buy them directly.

So, doing some quick calculations on one of his trades (the NASDAQ: QQQQ), we can look at the "what if?" scenario.

He bought QQQQ when it was at $29.99. This is near the option strike price of $30, so we'll assume that would have been the option he would have chosen, and also assume he's buying calls since he expected the market to go up in the short term.

Going back time as best we can, we can calculate that the price for that option on Friday, October 10th, would have been something around $3.062, or $306.20 per contract since each contract controls 100 shares of the security.

When he sold on Monday, he got $35.13 for each share of QQQQ for a profit of $5.14 per share. He had 25 shares, so made $128.50 which is about a 17.1% profit. That's a heck of a lot better than any mutual fund you'll find!

Good job Ryan!

But what about the options?

Going through the estimating calculator again, the $30 strike option would have been worth $6.634 ($663.40 per contract). And since Ryan knows what he's doing he would have sold out and made $357.20 per contract, which works out to about a 117% profit.

It's not often that you get to double your money over a weekend, but you can see how the leveraging and valuation of options can increase profits substantially over purchasing stocks directly.

Here's the video version: