of the stock market

If the share price of XYZ goes up to $1. 20 in the month, then you can exercise your right to buy the shares at $1. 00. You will therefore make a profit per share of 16 cents ( $0. 20 profit – $0. 04 premium ). With 10, 000 shares, you will make a profit of $1, 600, or 400 % on your original investment.

Had you invested $10, 000 in the first place, you would have only made $2, 000, or 20 % profit.

At the same time, had the price fallen below $1, say to $0. 80 cents, then you would not exercise your right to buy the shares and you would walk away, losing only your $400. You have the option to buy the shares, not the obligation. But, if you had bought the shares, you would have lost $2, 000, or 20 % of your original capital.