Stocks vs options and which strategy is better? That all depends on your trading style and risk tolerance.
Stocks allow you to buy security shares at times the number of shares purchased.
Options allow you to trade the stock without putting 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.
Stocks vs options is 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, and investing. That is one of the great things about 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 of Stocks vs Options
When considering 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 buyers and sellers. As a result, the price fluctuates. Sometimes, the market trades sideways. When that happens, it can be frustrating to trade.
In this case, options trading is a great resource. Some options strategies allow the trader to make money whether the market is up, down, or trading sideways.
Options do have more moving parts than stocks. This affects profit potential both positively and negatively. In essence, return on investment (ROI) can be a hundredfold, or you could lose the entire principal, too much more, if the plan 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 the part of the corporation’s assets and earnings.
In other words, you own a stake in a company by being a shareholder. It all depends on how many shares you own. If you own 100 shares of a company that trades 2,000,000 shares, your stake in the company is minuscule.
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The majority of people who trade stocks typically sell when they have a profit. That can include day trading them for a quick profit, an incredibly popular way to trade stocks.
You can also use swing trading techniques and hold them overnight or longer. Additionally, they can invest, buy, and hold 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 some time instead of intra-day. One of 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 the option to execute the contract into shares allows the trader to continue to hold the shares until the target is met.
Final Thoughts on Stocks vs Options
Options add a 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, I want to buy Amazon, which is trading at over $1,800. If you bought 100 shares of AMZN, you would be spending $180,000.
However, buying the contract at $16.75 is only $1,675 to access the same share amount. As a result, putting up much less capital offers the opportunity to buy the stock at a discount.
Suppose the chart goes the opposite way, which would lose 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 so is a complete loss of principle. Some strategies minimize risk and help 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