Is Options Trading Better Than Stocks?
- Jerry Lim
- Jul 6, 2023
- 3 min read
Are you a working professional considering to invest your hard-earned money? Perhaps you've heard about options trading and want to know if it's better than stocks.
As someone who has spent over a decade trading options and managing investment portfolios for clients, I've been asked countless times about the differences between options and stocks. So, let me share some insights as to why options might be a better investment for specific portfolios and investors.
Key Difference Between Options and Stocks
Price: Options are generally cheaper than stocks because you're buying a contract to purchase the stock, not the stock itself.
It's easy to understand the price difference between options and stocks by looking at a simple example. Let's say you want to invest in a popular tech company like Apple with a current stock price of around $190. You would need to invest $190,00 upfront to control 100 shares. However, if you were to purchase a call option on Apple instead, you would only have to pay a fraction of that price at $190 to control 100 shares of Apple.
Advantages of Options Over Stocks
Leverage: Options allow you to control a large amount of stock for a relatively small cost (the premium), providing more bang for your buck.
First, let's look at leverage. Leverage can be a double-edged sword, as it involves taking on a larger position than you might otherwise be comfortable with. However, when used responsibly, leverage can be a powerful tool to amplify your potential gains without committing a significant portion of your portfolio to a single stock. This can instill a sense of confidence as you watch your profits increase.
Limited Risk: When buying options, your risk is limited to the premium paid, making it easier to manage potential losses.
Next, let's talk about limited risk. One of the most common challenges investors face is the fear of losing money. Unlike stocks, where the potential for loss is huge, options allow you to specify the amount of money you are willing to risk on a trade. This means that your losses are capped even if the trade goes against you. This limited risk provides a sense of security and peace of mind that often accompany investing in the stock market.
Hedging: Options can be used to hedge against potential losses in other investments, adding a layer of protection to your portfolio.
Perhaps the most significant emotional benefit of options trading is the ability to hedge against potential losses in other investments. Hedging can be a powerful way to manage risk and protect your investments, like an insurance contract. Knowing that you have a layer of protection in your portfolio that can cushion the impact of market downturns and other unexpected events can give you a sense of security and reduce the fear of losing money. This empowerment can help you make more rational, level-headed decisions rather than giving in to the emotional rollercoaster of stock market fluctuations.
When to Choose Options Over Stocks (and Vice Versa)
Options might be a better choice over stocks when:
You want to take advantage of leverage to control a large amount of stock with a smaller investment.
You have a specific view on a stock's price movement and want to capitalize on it.
You want to hedge against potential losses in other investments.
On the other hand, stocks might be a better choice when:
You want to hold onto an investment for a long time.
You're looking for dividends or voting rights.
You prefer investments that are simpler and easier to understand.
In conclusion, whether options or stocks are better depends on your circumstances, including your risk tolerance, investment goals, and market knowledge. Hence, it's crucial to understand how great investors are using options to grow their wealth. That's why I highly recommend attending our free options introduction class before investing your hard-earned money.
During this class, you'll discover:
- The power of options trading
- How Warren Buffett uses options
- Who should consider options
- And much more!
Our class is suitable for beginner and intermediate investors interested in learning more about options trading.
So don't miss out on this fantastic opportunity to expand your investment knowledge and skills. Follow the link on my landing page and sign up for our free options introduction class today!
Empower yourself with knowledge and take the first step towards achieving your investment goals.
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