When people hear the word leverage, they often think of debt, danger, or excessive risk. But in the context of options trading, leverage means something different—and much more strategic. The leverage built into options contracts allows traders to control large amounts of stock for a relatively small investment. As a result, even a modest move in the underlying stock price can generate outsized returns compared to traditional stock trading.
This article explores how options naturally provide leverage, the mechanics behind this disproportionate return structure, and real-world examples like call options on oil stocks (e.g., Schlumberger, or SLB) and put options on Macy’s stock. Whether you're new to options or looking to refine your trading strategy, understanding this key concept is essential to unlocking the full potential of options trading.
Understanding the Built-In Leverage of Options
Options contracts give the buyer the right, but not the obligation, to buy (in the case of a call) or sell (in the case of a put) 100 shares of a stock at a specified price (strike price) before a certain expiration date. This contract can be purchased for a premium, which is typically much smaller than the cost of buying 100 shares outright.
This relationship sets up a built-in leverage effect. You’re putting in a small amount of capital for the potential to benefit from the price movement of 100 shares of stock.
Let’s break that down.
🔍 Basic Leverage Comparison: Stock vs. Option
Stock Trade Example:
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XYZ stock = $50/share
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Buy 100 shares = $5,000 investment
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If stock goes to $55 → Gain = $500
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Return = 10%
Option Trade Example:
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Buy 1 call option on XYZ (strike $50) for $2 premium → Total investment = $200
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Stock rises to $55 → Option value ≈ $5 (intrinsic value)
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Option now worth $500 → Gain = $300
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Return = 150%
Same price movement in the stock ($5), but dramatically higher percentage gain due to the lower initial capital outlay for the option.
How Options Multiply Returns
The secret sauce lies in the asymmetry between cost and exposure. When you buy an option:
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Your maximum loss is the premium paid.
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Your potential gain is technically unlimited (for calls) or substantial (for puts).
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A small move in the stock, when timed right, can cause the delta and gamma of the option to magnify your gains.
This makes options especially powerful in short-term trading, earnings plays, or when you anticipate sharp directional moves.
Real-World Example: SLB Call Option
Let’s say you believe oil prices are about to surge due to geopolitical tension, and you want to take a bullish position on Schlumberger (SLB), a major oilfield services company.
🛢 Scenario:
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SLB stock price = $45
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Buy 1-month call option, $45 strike, premium = $1.50
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Total cost = $150 (since 1 contract = 100 shares)
Within 10 days, oil prices rally, and SLB shoots up to $50.
📈 Stock Position:
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100 shares at $45 = $4,500
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At $50 → Value = $5,000 → Gain = $500 → Return = 11.1%
💥 Option Position:
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Intrinsic value = $5 ($50 - $45)
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Option now worth $5 × 100 = $500
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Profit = $500 - $150 = $350
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Return = 233%
This is more than 20x leverage on your capital, with risk clearly defined.
Real-World Example: Macy’s Put Option
Now let’s flip the scenario and look at a bearish setup.
You believe Macy’s (M) is going to report disappointing earnings.
🛍 Scenario:
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Macy’s stock = $20
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Buy 1-month put option, $20 strike, premium = $0.80
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Total cost = $80
After earnings, the stock drops to $16.
📉 Stock Short (hypothetical):
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Short 100 shares at $20 = -$2,000
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Buy to cover at $16 = $1,600 → Gain = $400
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Return = 20% (not factoring borrowing costs or margin)
🚀 Option Position:
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Intrinsic value = $4
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Option now worth $400
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Profit = $400 - $80 = $320
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Return = 400%
Again, a small move in the underlying led to massive profit on the option, thanks to its leverage.
The Mechanics Behind the Leverage
The leveraged returns in options are driven by:
1. Low Initial Investment (Premium)
This is the biggest driver of high ROI. A smaller denominator (cost) means any gain will be magnified in percentage terms.
2. High Delta and Gamma in ITM Options
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Delta measures how much the option’s price changes with the underlying.
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Gamma shows how fast delta is changing.
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These metrics accelerate as options get “in-the-money,” amplifying gains as moves continue in your favor.
3. Volatility Expansion
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If implied volatility increases, your option becomes more valuable—this can turbocharge returns even without a massive price move.
Video Course Insights: Breaking Down Real Examples
A recent options course provided compelling side-by-side comparisons of trades in SLB and Macy’s:
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SLB Call Option: Showed how a $150 investment returned $350 in a week—a 233% return from a modest oil price spike.
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Macy’s Put Option: Demonstrated a 400% return from a post-earnings drop, with controlled risk.
These examples drive home a crucial point: Options are not inherently risky if used properly—they’re actually very efficient risk management tools.
Strategic Benefits of Leveraged Options
✅ Capital Efficiency
You can trade high-dollar stocks (like Google or Amazon) with a few hundred dollars.
✅ Defined Risk
Your loss is capped at the premium paid. Compare that to stocks, where downside is often much larger.
✅ Multiple Positioning
With limited capital, you can take multiple directional or hedged trades, diversifying across sectors or strategies.
✅ Directional Leverage
Bullish or bearish, options amplify movement in your direction. With proper planning, you benefit even from small market moves.
Risks to Watch Out For
While leverage is exciting, it comes with caveats:
❌ Time Decay (Theta)
If the stock doesn’t move fast enough, your option loses value daily.
❌ Out-of-the-Money Options
These are cheaper but riskier. If the stock doesn’t reach the strike, the option expires worthless.
❌ Volatility Collapse
If implied volatility drops, the value of your option may decline even if the stock moves in your favor.
✅ Pro Tip: To balance risk and reward, many pros start with in-the-money options or use spreads to control theta.
Conclusion: Small Moves, Big Potential
Options trading is not just about complex strategies—it’s about leverage done right. A well-timed, modest move in a stock can result in triple-digit returns on a relatively small investment. As seen in real-world cases like SLB and Macy’s, a $150 or $80 premium can turn into hundreds in profit, with risk that’s capped and known from the start.
For traders seeking more from their capital, options offer a way to:
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Access big-name stocks affordably
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Multiply returns on market moves
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Keep downside controlled and defined
Understanding and harnessing this leverage is what separates beginner dabblers from professional-caliber traders.
📘 Recommended Resource: “
” by Sajjad
This beginner-friendly guide is packed with real-world examples, strategy breakdowns, and visual illustrations that help you master leverage and risk in the options world.
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