Two main differences of trading options rather than stocks are that options trading can limit an investor's risk and leverage investing potential. An option buyer absolutely cannot lose more than the price of the option, the premium. Because the right to buy or sell the underlying security at a specific price expires on a given date, the option will expire worthless if the conditions for profitable exercise or sale of the contract are not met by the expiration date. This leverage means that investors may be able to increase their potential reward from a stock's price movements by using options. Although the dollar amount gained on the stock investment is greater than the option investment, the percentage return is much greater with options than with stock.
Leverage also has downside implications.
If the stock does not rise as anticipated or falls during the life of the option, leverage will magnify the investment's percentage loss. Investors should take note, however, that as an option buyer, the most you can lose is the premium amount paid for the option. Other key differences between options and common stocks are in how the investment is structured. Common stocks can be held indefinitely by a buyer, whereas options have an expiration date. There are no physical certificates for stock options as there are for common stocks.