Call Options vs. Shares: 6 MAJOR Differences

Long Call vs Long Stock

There are some pretty significant differences between buying call options and buying stocks. Before we examine how these types of securities differ, it may first help to understand a few ways in which they are alike.

1.) Both long calls and long stock positions are bullish.

If you purchase a stock, you anticipate that stock will go up in value. If you purchase a call option on that same stock, you are also bullish. However, call option buyers are much more bullish than stock buyers. 

2.) A call option can “trade like” a certain amount of shares. 

In options trading, the “Greeks” are a series of calculations traders use to determine how an option will react to various market movements. The Greek “Delta” tells traders how an option will react to an immediate $1 move in the price of the underlying security. 

Delta also tells us how many shares of stock an option “trades like”. If a call option has a delta of .50, this tells us this option will trade like approximately 50 shares of stock. Unlike stock, however, the option Greeks are in constant flux with time and volatility.

Now that we understand the limited ways in which these types of securities are similar, let’s now explore how stocks differ from options

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TAKEAWAYS

  • For long-term investors, stocks tend to out-perform call options.

  • Stock (or equity) comes with certain rights, such as the right to receive dividends. Call options have no such rights.

  • Options are usually leveraged at a ratio of 100:1, meaning one contract represents 100 shares of stock. 

  • If the price of a stock remains the same, a shareholder will not lose money. Call options shed value as time passes if the stock remains the same. 

  • All call options will expire at some future, pre-specified date (expiration date)

  • In theory, stocks have greater principle risk than options. 

1) Stock Represents Ownership

When you buy a share of a company’s stock, you are buying a piece of that company. This is known as “equity”. 

Having “equity” in a company comes with certain benefits:

Options contracts are “derivative” instruments. This means their value is derived from the underlying security. Though the owner of a long call does indeed have the right to convert their contract to 100 long shares at any time, until this “exercise” happens, they have none of the rights that stock owners have. In the eyes of the company, they do not exist. 

In fact, call options actually go down in value when a stock goes “ex-dividend”.

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2) Call Options Offer Leverage

As explained by FINRA, options are standardized contracts. This standardization allows for greater market liquidity and regulation. 

Part of an options standardized terms pertains to the “multiplier effect”.

Option Contract Multiplier Definition: Standard call and put options have a multiplier of 100, meaning that one contract represents 100 units or shares of the underlying stock, exchange-traded fund (ETF), or index

To better understand how option leverage works, let’s look at an example from the tastyworks trading platform:

Buying 100 Shares of AMZN

The above image shows an order to buy 100 shares of Amazon (AMZN) stock. The cost of this trade? Over 340k.

Now, let’s take a look at an at-the-money call on AMZN expiring in a few days. 

At-The-Money AMZN Call

AMZN Call

The above shows an order ready to buy a call option on AMZN. 

We said earlier that a call option delta shows us “how many” shares of stock a contract mimicks. This call option has a delta of about 50. If we were to buy two of these calls, our delta would match that of 100 shares of stock!

  • Cost of 100 AMZN Shares: $341,000
  • Cost of 2 ATM Call Options: $7,330 ($3,665 x 2)

As you can see, by using options we can get the same exposure to AMZN for a significantly reduced price when compared to buying the stock.

Sound too good to be true? That’s because it is! Options come with significant risks. One of these risks is “time decay“. Let’s explore the detrimental effect of time decay next.  

3.) Call Options Experience Time Decay

If you were to purchase 100 shares of AMZN at $3,405 per share, and if in one week AMZN was still trading at $3,405, you would neither have made nor lost money. 

However, if you purchased an at-the-money 3,405 strike price call on AMZN last week, and the stock was unchanged when the option expired, you would lose 100% of the premium you paid. For us, that would mean a total loss of $7,330. Though options trading does offer leverage, you indeed pay for this privilege!

I prefer trading vertical spreads to hedge some of this risk. 

Time decay is also known as “theta”, which is another option Greek (we already know delta!).

The below table shows the theta for options on AAPL:

AAPL Options Chain

Type Strike Price Theta

Call

147

3.25

-.52

Call

148

2.63

-.56

Call

149

2.11

-.54

Where AAPL is trading at $148.20 and expiration 2 days away.

The above theta value shows us how much the each corresponding AAPL call option will decline in value with every passing day. This assumes an environment of constant implied volatility and stock price. 

To go in-depth on theta, check out our video below!

4) All Call Options Expire

One of the standardized terms of an options contract is its expiration date.  All options expire. Some options expire in hours, other expire years into the future (these are known as Long-Term Equity Anticipation Securities (LEAPS)).

Stocks never expire. Eventually, most companies will become defunct either through bankruptcies or mergers, but the stock itself does not have a prearranged expiration date. 

Options are decaying assets. In a constant environment, they are persistently shedding value (as we learned above).

The below image shows how the value of an option slowly sheds as the stock remains the same and expiration approaches. 

Option Pricing

5) Call Options vs. Stock: Principal Risk

Long Call vs Long Stock

From a total risk perspective, call options have less principle risk than stock. 

Now, this can indeed be misleading We are looking at this through a theoretical lens; or a “worse case scenario” perspective. 

Let’s revisit our AMZN example above. Remember, we spent $7,330 to buy 2 call options that gave us the same exposure to AMZN as 100 shares of stock. This stock cost us $341k.

  • Shares Maximum Loss: $341,000
  • 2 ATM Call Options: Maximum Loss $7,330 ($3,665 x 2)

If AMZN were to plummet to $0 in value overnight, we would lose A LOT more on the stock than the options. 

However, AMZN will most assuredly not be trading at $0 in the next few days. Therefore, this perspective is not very reasonable. But it is possible!

6) Call Options vs. Stock: Liquidity

Stock Market Liquidity Definition: The ease in which a security can either be entered or converted into cash.

Generally speaking, equities have better liquidity than options. When trading stocks, we are usually only concerned with two aspects of liquidity: daily volume and the bid/ask spread.

The below image (taken from the tastyworks trading platform) shows the current market for Tesla (TSLA) stock. 

The above image shows we can purchase TSLA stock for $1,189.23 and immediately sell it for 1,188.42.

Considering the stock is trading 1k+, that is a pretty tight market. 

What about options on TSLA?

 

TSLA Call Options Liquidity

When we are looking at options, we need to add a few more liquidity variables:

 

The 1175 call option on TSLA is bid at $92.10 and offered at $95.15.

This means that if we were to immediately buy and sell this option, we would lose $3.05.

When compared to the stock, the liquidity on options is almost always worse. 

It is therefore important to always try and get filled at the mid-price when placing an options trade. Never use market orders on options. Slowly work call (and put) option orders in nickel increments, until you are filled. 

If the open interest and volume on a particular option series is low, it is best to avoid those options altogether. 

Final Word

Perhaps the greatest distinction between call options and stocks is the risk: options have inherently more risk than stocks. 

Stocks are generally held as long-term investments; options are short-term “trades” that require diligence and maintenance. 

Let’s conclude our article by going over a recap of what we learned. 

  • Stocks pay dividends; options don’t
  • Call options offer a 100:1 ratio
  • As time passes, call options decay in value
  • All call options will expire
  • Options have less principle risk than stocks
  • Stock have better liquidity

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Mike Martin

Mike Martin

Mike was a writer for projectfinance. He has spent over 15 years in the finance industry, working for such companies as thinkorswim, TD Ameritrade and Charles Schwab. His work has appeared in the Financial Times, the Chicago Sun-Times, and The Buffalo News.

The Best Brokerage for Traders

We’ve been trading with tastyworks for years, benefiting from their trader-friendly fees:

  • Free Stock Trading
  • $10 Commission-Cap Per Option Leg
  • Close Trades for Free*
  • $10 Max Fee Per Crypto Order

Use the link below to check out the tastyworks $100 to $2,000 signup bonus offer.

* Applicable exchange, clearing, and regulatory fees still apply to all opening and closing trades except for cryptocurrency orders which are not subject to exchange, clearing, and regulatory fees.

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