Seven Options Myths Debunked
By Stock Options Channel Staff
Myth #2: Cheap Options Are Less Risky To Buy
When buying options your downside is limited to the amount of money you spent to purchase the contracts, so does it follow
that buying the cheaper
options therefore carries less risk? While it is true that buying 10 contracts at 50 cents puts considerably more money at
risk than buying 10 contracts at 5 cents, the other part of that picture is the strike price in each scenario, the time to
expiration in each scenario, and the comparable probability the contract is in-the-money at expiration.
Suppose a stock trades at 10, and you purchase a call at the 15 strike that expires in just a few trading days. You could
purchase such a call with a very low price per contract, but unless the stock is exceptionally volatile, are the odds really
with you that it will make a 50% surge in just a few days? More likely than not, you will have just made an incredibly risky
bet. So even though the total sum of money you put at risk may be small, the chance of your losing that money will be large.
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