What’s the Difference Between Trading Options and Stocks?

I’ve gotten a lot of questions lately from my beginner traders about whether to do options trading or stocks trading. Both versions of trading have their advantages and disadvantages but for those who are just getting started, deciding which is right for you may be a bit confusing.

John Balauat my wonderful assistant coach in my stocks and crypto trading school share’s his expert knowledge on this topic and we hope this can help you make the right decision with your trading.

 

What’s the Difference Between Trading Options and Stocks?

 

We’re getting more students asking about trading options so I’m gonna use this week’s article to explain some differences between options and stocks.

Ready to learn? Let’s go!

 

How Do Options and Stocks Differ?

 

Stocks are pretty straightforward. They’re a type of security that gives stockholders ownership in a publicly-traded company. The shares can be bought or sold on a stock exchange.

Options, on the other hand, are represented by options contracts, usually written by institutional investors. Each option contract represents 100 shares of a particular stock and doesn’t make the purchaser an owner of the stock. Instead, it gives the investor the right — but not the obligation — to buy or sell the stock at a specific price on or before a certain date (known as the expiration date). Because options contracts have value, investors can trade them in hopes of gaining a profit.

 

Trading Options vs. Trading Stocks

 

Because of its simplicity, trading stocks is generally easier when compared to trading options — especially for newer traders. You’re pretty much just buying and selling because there are no expiration dates to worry about and shares don’t normally become worthless.

A company would have to go bankrupt or delisted for that to happen.

Trading options are a little more complicated because investors are trading contracts that are based on a stock’s future price action. The value of those contracts is influenced by a stock’s price, the time of the options contract expiration, and the price that other traders are paying for similar contracts.

There are two different types of options contracts: Call options and put options. Call options allow an owner to buy shares at a set price (called a strike price) and put options allow an owner to sell shares at the strike price.

Traders trade call options when they think a stock is bullish (going to go up) and they trade put options when they think the stock is bearish (going to go down).

 

What Are the Risks?

 

When it comes to trading stocks, a trader will retain some of their investment as long as the stock stays above $0. Even if the stock price goes south, a trader could sell for a loss and keep some of their investment.

With options, though, a trader could potentially lose their entire investment if the contract never reaches its strike price and if it expires. The truth is, most options traders have no intention of using the contract to purchase the stock, so they sell the contract before the expiration date to avoid this from happening.

The real benefit of trading options is that they’re less expensive than buying stocks. You can use less of your capital to make money off higher-priced stocks. So, in that sense, it’s less risky than trading stocks.

 

Conclusion

 

As you can see, there are risks when it comes to trading both stocks and options. Risk will be part of the game no matter what you trade.

There are positives and negatives to both and your responsibility as a trader is to know what they are so that you can navigate and limit those risks.

I personally love trading options and if you know what you’re doing, it can be a great way to generate income.

 

– John Balauat

 

Do you want to become a better trader? Come join our Stocks, Trading & Crypto group. We meet every morning at the trading bell so that everyone can learn faster and more effectively. We’d love to have you join us!