Option vs Stock. Which one should you buy?

Well, it depends upon the buyer’s need. If the buyer wants to make use of short-term movement in the stock that he expects, he may go for options. Options are the cheapest and safest mode of buying the right to buy or even sell a stock (not the actual stock itself). Let’s see both scenarios assuming that if you had tried both. Let’s assume that you expect TCS to move to INR 2000 from current levels of 1830 and that you try both options and stocks.

Zero Brokerage NRI Trading Option vs Stock. Which one should you buy?

Case I – If you buy TCS2000CE July2018 at Rupees 10

Note that NRIs too can buy Options. Click to know more. Lets explore the outcome of buying options

Positives

a) Low investment. Options trade in lots and you cannot buy 1 share. Your investment is therefore 500 (size of 1 lot) * 10 =5000
b) If the stock does not move in the direction you predicted by July last Thursday, the maximum loss that you would incur is limited to 5000

Concerns

a) It is time bound. This becomes 0 on the expiry date (that is the last Thursday of each month) and you lose all you paid if your expectation does not come true within the expected time.
b) Options are derived from an underlying instrument. Hence, there are risks of underlying moving, in our case, TCS moving in the expected direction and options i.e, the TCS2000JULCE not
moving proportionately
c) corporate action benefits such as dividends, bonus, rights etc., are not available for  options buyer
d) Tax – Profits are taxed at 30% as this is considered as speculation.

Case II – If you buy 500 TCS

Positives

a) You own the stock and this will be delivered to your demat account
b) You will be eligible to get dividend credits, bonus, rights etc., if any
c) You may hold it endlessly till such time you decide to sell it. Unlike options, this will not be made zero after a given time. 
d) Tax – you will have to pay 15% if you make a short-term profit and 10% as per the grandfathering clause if it ends at a long-term profit.

Concerns – Higher investment as compared to options

Now coming back to the question of buying options or stocks. One got to decide based on the aforesaid points and their objective of buying the stock. If you want to catch the expected short-term move and is comfortable with options its Greeks etc., you may choose to stick to it. If you are not well versed with derivatives and want to hold for long-term though might sell in the short term if it moves up.

OPEN ACCOUNT BUTTON 4 Option vs Stock. Which one should you buy?

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