Stocks vs Options: Which Trading Strategy Is Better for You?
Stocks vs options and which strategy is better? That all depends on your trading style and risk tolerance. Stocks allow you to buy shares of the security at the amount times number of shares purchased. Options allow you to trade the stock without having to put out the full amount of capital. You purchase an options contract and pay a premium, which controls 100 shares of the stock. You can hold a stock for as long as you want whereas options have an expiration date. Watch our video on the differences between stocks vs options.
Stocks vs Options: Are Options Better Than Stocks?
- Simple breakdown of stocks vs options and which are better:
- Advantages of options:
- Can trade shares of big name companies without needing a lot of capital
- Can make money with options in bullish, bearish, and sideways markets
- Many traders use them as a hedge to shares
- Advantages of stocks:
- Easy to get in and out of a trade
- Don’t need to worry about time decay and options Greeks
- Less risky than options
- Both trading styles can be advantageous depending on strategy
Stocks vs options is the debate that many traders have. There are differences and benefits to both. Watch our video to see which trading strategy would be the best fit for you.
It’s all about the strategy you wish to use. Stocks and options can be used for day trading, swing trading as well as investing. That’s one of the great things for trading. You have options; literally.
You can buy stocks, which represents ownership in a company. However, options allow you to bet on a direction. When betting make sure you’ve mastered options trading.
Basics of Stocks vs Options
When thinking of trading in the stock market, people tend to think of stocks. However, there is another form of trading that is fast paced and exciting.
The market is a tug of war between buyer and sellers. As a result, price fluctuates. Sometimes, the market trades sideways. When that happens it can be really frustrating to trade.
In this case, options trading is a great resource. There are options strategies that allow you to make money whether the market is up, down or trading sideways.
Options do have more moving parts that stocks. This affects your profit potential both positively and negatively. In essence, your return on investment can be a hundredfold or your loss could be much more.
Stocks aren’t nearly as volatile. This can be great when investing long term. Using day trading strategies that work is another great way to grow your brokerage account.
What Are Stocks and Options?
Stocks allow you to buy shares of a particular company. You can long them or go short. Options allow you the ability to trade these companies at a fraction of the cost. A stock option allows you the right but not the obligation to buy or sell shares of an underlying stock at a specific price within a specific expiration date.
What are stocks? According to Investopedia, stocks are a type of security that signifies ownership in a corporation and represents a claim on part of the corporation’s assets and earnings.
In other words, by being a shareholder, you own a stake in a company. It all depends on how many shares you own. If you own 100 shares of a company that trades 2,000,000 shares, you’re stake in the company is minuscule.
The majority of people who trade stocks typically sell when they have a profit. That can include day trading them for a quick profit, which is an incredibly popular way to trade stocks.
You can also use swing trading techniques and hold them overnight or longer. Additionally, you can invest, buying and holding long term. Stocks are the foundation of investment portfolios.
Trading a stock is pretty cut and dry. You buy it at a price you want. However, your entire order doesn’t always fill at the right price. Once you have your shares, if day trading, you sell when you’ve hit your profit target.
If you’re swing trading, then you’re holding your stocks for a period of time instead of intra-day. One the benefits of swing trading stocks vs options is that your trade won’t be affected by the passage of time known as “time decay” or theta. Make sure to learn the process of swing trading options.
With stocks vs options you don’t have an expiration date with stocks. If you don’t reach your profit target in a certain amount of time, it’s ok because you can continue to hold the shares until you do reach your target. Take our swing trading course.
What Are the Best Stocks to Trade Options On?
- Here are some tips on the best stocks to trade options on:
- Look for well known large cap stocks
- Tight bid/ask spread
- High open interest and volume
- Stock options such as:
- $AAPL: Apple
- $FB: Facebook
- $NFLX: Netflix
- $GOOG: Google
- Also, some ETF’S like $SPY, $DIA, $GLD
Options add a whole different opportunity in stocks vs options and require a different strategy. Options trading gives you the right but not the obligation to buy or sell a stock at a specified price or “strike price”.
One options contract controls 100 shares of a stock. This means that options trading is less expensive than trading shares. For example, if you wanted to buy Amazon but it’s trading at $1,840. If you bought 100 shares of AMZN you’d be spending $184,000.
However, if you bought one options contract at $16.75, you’d only be spending $1,675 to have access to the same amount of shares. As a result, you’re putting up much less capital, and it offers you the opportunity to buy the stock at a discount. It’s a great way to trade when you need to know how to invest in the stock market with little money.
Again, options also have time decay, extrinsic value and implied volatility that affect the profit and loss of your trades. Read our post on the implied volatility formula and its meaning.
If that goes against you, you’re losing more than you would if you owned shares. In contrast, time and volatility can also make your profits much more than just the shares.
You can have over a 100% return on your investment with options. There are options strategies that minimize risk and allow you to make money in any market condition.
Do Option Traders Make Money?
Yes, option traders can make money depending on trading strategy. Selling options such as credit spreads is the safest and one of the most popular strategies to make money. Buying naked options is a lot riskier, however, many people profit this way. One of the most common ways to profit quickly is day trading options.
Practice Stocks vs Options
When deciding to trade stocks vs options, the best advice would be to practice. You may find that you prefer one over the other or even both. Learn how options trading works with all its moving parts.
Learn the different options strategies. Practice day trading and swing trading stocks. The best advice is simply to practice and find the strategy you like best. They’re both great options. Take our basic stock trading course to help you get started.