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. The trader can purchase an options contract and pay a premium, which controls 100 shares of the stock. The trader can also hold a stock for as long as wanted; whereas options have an expiration date.
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Stocks vs Options Explained
Stocks vs options is been a debate that many traders have. There are differences and benefits to both.
Watch our video (above) to see which trading strategy would be the best fit. It is all about the strategy the trader wishes to use. Stocks and options can be used for day trading, swing trading as well as investing. That is one of the great things for trading. You have “options”; literally.
Traders can buy stocks, which represents ownership in a company. However, options allow you to bet on a direction. Learning the basics will help with mastering options trading.
Basics
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 the trader to make money whether the market is up, down, or trading sideways.
Options do have more moving parts that stocks. This affects profit potential both positively and negatively. In essence, return on investment (ROI) can be a hundredfold or could lose the entire principle; to much more if the plan really goes against the trader.
Stocks are not as volatile. This can be great when investing long term. Using day trading strategies is another great way to grow a brokerage account.
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.
Take Profits
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.
Can also use swing trading techniques and hold them overnight or longer. Additionally, can invest, buying and holding long term if the trader chooses to execute the options. Stocks are the foundation of investment portfolios.
Trading a stock is pretty cut and dry; buy it at the price wanted. If day trading, sell when profit target is reached.
If swing trading, then holding stocks for a period of time instead of intra-day. One the benefits of swing trading stocks vs options is that the trade will not be affected by the passage of time known as “time decay” or theta.
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 of the option to execute the contract into shares, which allows the trader to continue to hold the shares until target is met.
Why Options?
Options add a whole different opportunity in stocks vs options and require a different strategy. Options trading gives the right but not the obligation to buy/sell a stock at a specified price or “strike price“.
One contract is equal to the right to control 100 shares of a stock. This means that options trading is less expensive than trading shares. For example, want to buy Amazon but it is trading at over $1,800. If you bought 100 shares of AMZN you would be spending $180,000.
However, if bought one contract at $16.75, which is only $1,675 to have access to the same amount of shares. As a result, putting up much less capital, and it offers the opportunity to buy the stock at a discount.
Again, options also have time decay, extrinsic value, and implied volatility that affect the profit and loss of trades.
If the chart goes the opposite way planned, which would 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.
Over 100% return on investment with options is possible, but also so is complete loss of principle . There are options strategies that minimize risk and help to make money in any market condition.
Frequently Asked Questions
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.
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.
- 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
