There is an opinion that "Buy Call" strategies have much more risk and return than "Buy Stock" strategy. It's like a sharp knife: if you know how to use it, you will work very efficiently. However, if you are not experienced, you can hurt yourself. Two conclusions can be drawn from this illustration.

First, it is better to use a sharp knife - in our language it is the "Buy Call" strategy - because it will help you to be more efficient, namely to control the risk and reward. Second, it is essential to know how to use it.

Let's consider the following example:

Figure: Call Option Buying vs. Stock Buying Example

Figure summarizes the results at expiration:

Figure: Call Option Buying vs. Stock Buying Example – Results at Expiration

"Buy Call" strategies have much more risk and return than the "Buy Stock" strategy. Your choice of a strategy is influenced by two factors: first, your forecasted stock price for the period before the call option expires; and second, your risk averseness, or how much extra risk you are willing to take for each additional unit of profit.

You can see below four price intervals: $99 (break-even for ‘less bullish’ strategy) to $105 (intersection of ‘moderate bullish’ and ‘very bullish’), $105 to $108 (intersection of ‘less bullish’ and ‘very bullish’), $108 to $110 (intersection of ‘moderate bullish’ and ‘very bullish’), and $110 and up.

Figure also shows that when the price is between $95 (current stock price) and $99 (break-even for ‘less bullish’ strategy), the ‘buy stock’ strategy is preferred over all ‘buy call’ strategies. To summarize, the choice of strategies is defined by two things: your contemplation about the future stock price and your attitude to risk.

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