Maximizing your profits: Stock vs. Options trading showdown with Tesla

There are several differences between trading stocks and options. While stocks offer investors the opportunity to buy and hold shares in a company, options provide traders with a flexible way to profit from changes in the underlying stock's price, volatility, and time decay.

Let's explore these differences in detail with real-world examples using Tesla stock.

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First, let's start with stocks. When you buy a stock, you own a share of the company and have the right to vote on company decisions at shareholder meetings. You can profit from an increase in the stock's price by buying low and selling high. However, if the stock price falls, you can lose money.

For example, if you had purchased 100 shares of Tesla stock on January 1, 2021, at a price of $729 per share and sold them on December 31, 2021, at a price of $1,100 per share, you would have made a profit of $37,100.

Now, let's talk about options. An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset (in this case, Tesla stock) at a specified price (the strike price) by a specific date (the expiration date). Options provide traders with the opportunity to profit from changes in the underlying stock's price, volatility, and time decay.

For example, let's say that on January 1, 2021, you bought a call option on Tesla stock with a strike price of $800 and an expiration date of January 15, 2021, for a premium of $15 per share. If Tesla's stock price increased to $1,100 by the expiration date, your call option would be in the money, and you could exercise it to buy 100 shares of Tesla stock at the strike price of $800. You could then sell those shares at the current market price of $1,100 and make a profit of $28,500 (minus the $1,500 premium paid for the option).

Options also offer traders the opportunity to profit from changes in the stock's volatility. Volatility measures the magnitude of the stock's price movements. Higher volatility generally leads to higher option premiums, while lower volatility leads to lower option premiums. For example, let's say that on January 1, 2021, you bought a straddle option on Tesla stock with a strike price of $800 and an expiration date of January 15, 2021, for a premium of $60 per share. A straddle option consists of buying both a call option and a put option with the same strike price and expiration date.

If Tesla's stock price moved significantly in either direction before the expiration date, the option would be profitable. This is because the increase in volatility would increase the value of both the call and put options. If Tesla's stock price remained relatively stable, the option would expire worthless, and you would lose the premium paid for the option.

Finally, options also have time decay, which means that as the expiration date approaches, the option's value decreases. This is because the likelihood of the option being profitable decreases as the time until expiration decreases. For example, let's say that on January 1, 2021, you bought a put option on Tesla stock with a strike price of $800 and an expiration date of January 15, 2021, for a premium of $20 per share. If Tesla's stock price did not fall below the strike price by the expiration date, the option would expire worthless, and you would lose the premium paid for the option.

Here is a comparison table that summarizes the profits of each scenario for trading Tesla stock:

​Scenario	​Profit/Loss
Buy 100 shares of Tesla stock on 01/01/2021 at $729 per share and sell them on 12/31/2021 at $1,100 per share	$37,100
Buy a call option on Tesla stock on 01/01/2021 with a strike price of $800 and an expiration date of 01/15/2021 for a premium of $15 per share, and exercise the option to buy 100 shares of Tesla stock at the strike price of $800 and sell them at the market price of $1,100 per share	$28,500 - $1,500 = $27,000
Buy a straddle option on Tesla stock on 01/01/2021 with a strike price of $800 and an expiration date of 01/15/2021 for a premium of $60 per share, and sell the option before expiration for a profit due to a significant increase in the stock's volatility	​Variable depending on the magnitude of the stock price movement
Buy a put option on Tesla stock on 01/01/2021 with a strike price of $800 and an expiration date of 01/15/2021 for a premium of $20 per share, and let the option expire worthless if the stock price did not fall below the strike price by the expiration date	​-$2,000

As you can see from the table, each scenario offers a different potential profit or loss.

1. The first scenario of buying and holding the stock resulted in a significant profit of $37,100, assuming the stock was sold at the end of the year.

2. The second scenario of buying a call option on the stock resulted in a profit of $27,000 after subtracting the premium paid for the option.

3. The third scenario of buying a straddle option resulted in a variable profit depending on the magnitude of the stock price movement.

4. Finally, the fourth scenario of buying a put option resulted in a loss of $2,000 due to the premium paid for the option.

It's important to note that these scenarios are just examples, and there are many other factors that can influence the profitability of trading stocks and options, such as market conditions, the strike price, and the expiration date of the options. As with any investment, it's important to do your research and carefully consider the risks and potential rewards before making a trade.

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