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Stocks VS Options

What’s better for you? Stocks VS Options is a highly researched topic. Learning the difference between stocks and options can help determine your path to financial freedom. In this article, we discuss both.

Stocks

When an investor or a trader purchases stock, they become a part owner, or shareholder in a public company. If everything goes well and the company produces a profit, the stocks may gain in value. As a shareholder, you benefit from price appreciation in the stock that you hold. In addition to price appreciation, some public companies also pay dividends on shares. Dividends are often an important consideration for long term investors who are looking for stocks to own. 

Stocks are registered and traded on exhcanges like the New York Stock Exchance or NYSE and the Chicago Board of Exchange or CBOE.

Today, purchasing stocks has never been easier. With the advent of apps like Robinhood, Acorn, ThinkorSwim, and Tastytrade, would-be investors can purchase shares easily. Many of these brokers allow the purchase of fractional shares which greatly reduce the price of owning stocks. Even more, brokers have reduced or eliminated many of the commissions, or expenses associated with the buying and selling of stocks on their apps.

Investors and traders both purchase stock, but for different reasons. 

Typically investors are looking for long-term price appreciation and traders are looking take advantage of short-term price movements. 

Typically, even though stock markets experience volatility in the short term, they move higher over longer periods of time. Historically speaking, the New York Stock Exchange (NYSE) has returned on average 6-7% annually. 

Investors

Investors looking to hold stocks should keep in mind that they are subject to short-term volatility and may not be appropriate for all investors. At the writing of this article in August of 2022, the NYSE has yielded a -2% rate.

Historical data shows, investors who are looking for long-term price appreciation may hold stocks on average of 10 years or more. 

Day Traders

Day traders use stocks to take advantage of price appreciation in smaller timeframes. These timeframes may last from a few days to weeks or months. These types of trades are often referred to as swing trades or momentum trades. Day traders often use specific indicators and strategies to become profitable. Simpler Trading’s TG Watkins has created a system he uses to consistently create profits in different market environments. If you want to learn how to trade stocks consistently and profitably, check out his class here.

Types Of Shares

There are two types of shares associated with a publically traded company. 

Ordinary Shares represent the ownership of a company. Shareholders who own ordinary shares are able to vote on issues realted to company policy. 

Preferred Shares are typically used by investors. These shares may be eligable for a divident payment, but do not allow voting rights on important company issues. 

Benefits of owning stocks

• Long-Term Price Appreciation
• May Pay Dividends
• Easy to understand. 

Challenges of owning stocks

• Longer time horizon
• Individual stocks may be risky
• Subject to short-term volatility. 

Options

Options are a financial contract that can be used to buy or sell stocks at an agreed-upon price. They have expiration dates, after which they’re worthless. Options derive their value from the underlying stocks that they represent, and are often referred to as a derivitve contract. 

An options contract gives the owner the opportunity to buy or sell the underlying asset, at a specified price known as the Strike Price,  before the expiration date. In exchange for the right to buy or sell the underlying stock, the buyer of the contract pays a premium, or fee, for the contract.

Each options contract represents, or controls the movement of 100 underlying shares. If the underlying stock price increases by $1, the options contracts value will increase by $100, with a Delta of one. This is known as leverage. Options contracts are also referred to as “leveraged derivitives”. 

Types Of Options

Call Option – A call option gives the buyer the right to buy the underlying stock at the strike price, before the expiration of the contract. When you purchase a call option, you are long, or expecting the underlying stock to increase in price before the expiration of the contract. 

Example: You expect Tesla (TSLA) shares to increase in price from $700 to $750. You want to participate in this price so you buy a $700 call option for $2500. TSLA is a darling, and the stock price increases to $750. Your options contract is now worth $5,000 or 50×100. You paid $2500 dollars in premium, so your net gain is $2500. You can sell the contract for the intrinsic value, or you can exercise the contract and buy the actual shares for $700 each.

The benefit of trading a leveraged contract is obvious in this example. To benefit from movement of 100 shares of TSLA, it would have cost $70,000 in capital without an options contract. 

Put Option– A put option gives the buyer the right to sell the underlying sock, at the strike price, before the expiration. When you purchase a put option, you are short, or expecting the underlying stock to decrease in price before the expiration of the contract. 

Example: You expect TSLA to decrease in price, from $700 to $650. You buy a put option for $2500 in premium. TSLA sees a sharp decline to $650. Your contract is worth $5000 ($50 x 100 shares) minus the $2500 in premium you paid for the option. Your net profit is $2500. 

Benefits of Options

• Leveraged Contracts
• Can make money if market moves up or down
• Less capital required to trade

Challenges with Options

• More time to learn
• Higher Risk
• Can expire

Options Trading

Options trading is one of the most efficient ways to create generational wealth. It may also be one of the most difficult. Because there are so many different ways to trade options, they can be profitable in any market condition. There are dozens of different ways that options can be traded. In this short blog, we discussed buyin options contracts. Did you know that you can also sell options contracts to generate premium? One of the best ways to learn how to trade options profitably is by learning from experts.

Stocks Vs Options: Which is right for you?

If you are a long-term investor, you may consider buying and holding stocks for longer periods of time.

If you‘re looking to generate income in a shorter timeframe, and willing to do your homework to learn how to be profitable, trading options contracts might be right for you. 

No matter what your choice is, Stocks Vs Options, Simpler Trading will help guide you on your way to financial freedom.

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