Options as Investment Leverage: CNBC Explains
By: CNBC Explains
In previous videos, we’ve explained call options in detail. You have learned that if the stock price goes up, call options allow you to make more profit per invested dollar, compared to simply buying a stock. By putting less money on the table to magnify profits, call options can have the same effect as investing with borrowed money, which is known as using leverage. Salman Khan of the Khan Academy explains how call options can be used as investment leverage and then looks at how put options compare to shorting a stock.
From this first video, you’ll understand:
- How a call option gives an investor financial leverage
- How gains and losses compare when buying a stock vs an option
From this second video, you'll understand:
- How put options give an investor financial leverage if a stock goes down
- How put options compare to shorting a stock
By putting less money on the table to magnify profits, call options can have the same effect as investing with borrowed money, which is known as using leverage. Put options can also be seen as acting like leverage when compared to stocks.
