Stocks Vs Options

There is a lot of debate out there whether it is better to trade stocks or options on the open market.  My personal opinion is options give you such an advantage that you shouldn’t ignore them.

Let’s compare buying the stock with buying an option.  When you buy the stock you are buying the individual asset at a given price.  When you buy the option you are buying the right to buy that asset at a fixed price on or before a given date.

So say the stock is trading at $90 and the option to buy the stock for $90 within 2 months is trading at $8.  If we buy the stock for $90 and it goes up to say $110 we would have made $20 or 22.2% in just 2 months.  That isn’t a bad return at all.

However if we bought the option instead and the price went up to $110 the $90 option would be worth at least $20.  And considering we bought it for $8 that would give us a profit of $12 or 150%, much higher than the return we would have gotten if we had bought the stock.

Ok so options can make bigger returns then stocks, we all knew that, but what happens if say we lose money?  Well if we bought the stock the most we could possibly lose is $90, it’s very unlikely but it could happen.

If we had bought the option out risk would be $8, which means we are risking much less on that trade then if we had bought the stock, provided we do not go out and buy ten times as much.

So, in conclusion stock options can give us a way to make huge profits in the stock market, while letting us control our risk. 

Of course options aren’t for everyone.  If you have a long term approach or if you just feel more comfortable holding the stock instead you probably don’t want to trade them.  However they can be a very valuable tool that can help you increase your returns in the market.

For more on stock options visit http://www.stocks-simplified.com/stock_options.html

For more on other trading strategies visit http://www.stocks-simplified.com