Calculating Your Return on Investment with Stock Options
Many investors use stock options to increase their return on investment (ROI). Stock options are contracts that give an investor the right to buy or sell a specific number of shares of a company’s stock at a predetermined price within a specified period of time. By using stock options, investors can potentially increase their ROI by taking advantage of the price fluctuations of a stock.
In order to calculate your return on investment with stock options, you need to understand the two main types of stock options: call options and put options.
A call option gives the investor the right to buy a certain number of shares of a company’s stock at a predetermined price within a specified period of time. If the stock’s price increases, the investor can buy the stock at the predetermined price and then sell it for a higher price, resulting in a profit.
On the other hand, a put option gives the investor the right to sell a certain number of shares of a company’s stock at a predetermined price within a specified period of time. If the stock’s price decreases, the investor can sell the stock at the predetermined price and then buy it for a lower price, resulting in a profit.
Once you understand the two types of stock options, you can calculate your return on investment with stock options by using the following formula:
ROI = (Profit from Stock Option – Cost of Stock Option) / Cost of Stock Option
For example, if you purchased a call option for 100 shares of ABC Company at $10 per share and the stock’s price increased to $15 per share, you would have a profit of $500 (100 x $5). If the cost of the option was $200, then your ROI would be (500 – 200) / 200 = 150%.
Similarly, if you purchased a put option for 100 shares of ABC Company at $10 per share and the stock’s price decreased to $5 per share, you would have a profit of $500 (100 x $5). If the cost of the option was $200, then your ROI would be (500 – 200) / 200 = 150%.
In conclusion, stock options can be a great way to increase your return on investment. By understanding the two types of stock options and using the formula above, you can easily calculate your return on investment with stock options.