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Using Call Options for Leverage: Amplify Returns with Defined Risk
Published June 7, 2025
Most investors know that buying on margin is a way to increase exposure — but what if you want leverage without risking a margin call? In this article, we'll explore how deep in-the-money call options can provide built-in leverage, allowing you to control more shares with less capital, while also defining your maximum loss.
Controlling More with Less
Suppose a stock is trading at $100, and you want exposure to 100 shares. Buying outright would cost $10,000. But instead, you could buy a call option with a strike price of $53 that costs $50 in premium. That means you pay $5,000 total — half the capital — to control the same number of shares. This is functionally equivalent to applying 2× leverage.
Understanding Time Value
Why does the option cost more than the difference between the stock price and strike? The answer is time value. In this case, the total cost is $53 (strike) + $50 (premium) = $103, while the stock is $100. That extra $3 is time value — the price you pay for leverage and flexibility. Over time, this value decays. By expiration, the option will be worth only its intrinsic value — any remaining time value will be gone.
Let's say the stock rises from $100 to $120 by the time the option expires. If you had bought 100 shares outright, your profit would be $2,000 (from $100 to $120 per share). But with the call option — strike price $53, premium $50 — the option's intrinsic value becomes $67 ($120 - $53), so your profit is $1,700 on a $5,000 investment. That's a 34% return with the call, compared to 20% if you bought the stock directly. And if the stock hits $120 before expiration, the option may still have some remaining time value, meaning its market price could be higher than $67 — pushing your actual return even higher than 34%.
Pros of Using Call Options for Leverage
- Defined risk with no margin calls: Your maximum loss is limited to the premium paid, with no risk of forced liquidation.
- Built-in leverage: Control more shares with less capital.
- Flexibility: Choose from a wide range of strike prices and expiration dates to match your outlook and risk tolerance.
Cons to Keep in Mind
- No dividends: You don't receive any dividends paid by the underlying stock.
- Limited time horizon: Options expire, and time value decays as expiration approaches.
- Potentially higher cost: In high-volatility stocks, the time value can be significant — making margin more cost-effective in some cases.
When to Use Call Options Instead of Margin
For low-volatility ETFs like SPY, deep in-the-money LEAPs can offer annualized time value costs as low as 1-5%, which is often cheaper than margin interest. In contrast, volatile stocks like TSLA or NVDA might have LEAPs with time decay exceeding 15-20% annually. In those cases, margin might seem cheaper — but it comes with the risk of a margin call. Options don't.
Call Options vs Margin: A Quick Comparison
| Feature | Call Options | Margin Buying |
|---|---|---|
| No margin call | ✅ | ❌ |
| Receives dividends | ❌ | ✅ |
| Maximum loss known | ✅ | ❌ |
| Time horizon | Limited (expiration) | Unlimited |
| Typical cost | 1-20% time value | 5-15% interest rate |
Final Thoughts
Call options offer a clean, defined-risk way to gain leveraged exposure — particularly when time value is low. They're especially compelling for SPY and other low-volatility assets with efficient LEAP pricing. But be mindful of the tradeoffs: no dividends, limited duration, and higher decay in volatile names. Used wisely, options can be a powerful leverage tool without the risk of forced liquidation.
Curious how this plays out in a strategy? Try simulating with call option leverage and compare it to margin leverage to see which one fits your risk profile.