How much exposure a structure produces per dollar of capital tied up; the reason defined-risk spreads and long-dated calls exist alongside stock.
Options let you separate exposure from capital. A deep in-the-money call reproduces most of a share position for a fraction of the outlay; a vertical spread reproduces a directional view for a fraction of a naked option's requirement; portfolio-margin recognises hedges and frees more still.
Efficiency is not the same as prudence. Every dollar freed is a dollar that can be deployed into more exposure, and the historical record of traders who used capital efficiency to increase size rather than to hold cash is not encouraging. The freed capital is only a benefit if it stays free.
Example: 500 shares of XYZ costs $25,000. Five one-year $35 calls cost $8,100 for about 85% of the exposure. Five $50/$55 bull-call-spreads cost $750 for a capped version of the same view. Three ways to be long, differing by a factor of thirty in capital.
Original diagrams for the ideas on this page. Illustrative, not real market data.
The bid-ask spread. Buy orders sit below, sell orders above, and the gap between the best bid (50.01) and best ask (50.04) is the spread you pay to cross. Bar length shows the size resting at each price.Buying a call: payoff at expiry. A 105-strike call bought for 3 loses that whole 3 if the price finishes at or below 105, breaks even at 108, then gains a dollar for every dollar higher. The loss is capped at the premium; the upside is not capped.
Educational only, not advice. Spotted an error? Post in Site Feedback.