Options vs. stocks is a trending topic these days.
Traders talk about stocks vs. options on Reddit forums like WallStreetBets all day.
The debate usually comes down to options vs. stock profits. Never mind the fact that these traders never share proof…
In 2017, I made a video on why I think options trading sucks.
Maybe these newbies are more skilled at options trading than Schwab traders … but I doubt it. It’s more likely that these new traders don’t understand the risk that they’re dealing with.
That’s not to say it can’t be done. One of my earliest Challenge students, Mark Croock, applies penny stock strategies to options. More on that in a bit…
I want more traders to see the awesome possibilities of trading. It’s changed my life. That’s why I started my Trading Challenge. I don’t like the idea that the life-changing power of trading only benefits a select few.
I love WallStreetBets and everything they’ve accomplished. They might be apes but they’re not dumb.
I LOVE #wallstreetbets & all they’ve done for the little guy, educating millions of people about alternative trading strategies rather than just buy & hold value investing that’s wasteful for small accounts, but stocks up 30-100x inside of a week MUST be sold into crazy strength!
— Timothy Sykes (@timothysykes) February 2, 2021
But if you want to make it in trading, you’ve got to outwork the rest of the field. That means having a plan and sticking to it.
When you learn the fundamentals, you can then focus on making any strategy work.
What do you need to know about trading options vs. stocks? Let’s get to it.
Table of Contents
- 1 How Are Options Different From Stocks?
- 2 Examples of Stocks and Options
- 3 Options or Stocks: Which One Should You Choose?
- 4 Can I Trade Stocks and Options?
- 5 Frequently Asked Questions About Options Vs. Stocks
- 6 The Bottom Line: Options vs. Stocks
How Are Options Different From Stocks?
First, let’s get the terminology right.
We’re talking about stock options vs. actual stock ownership here. Options are derivatives — financial instruments that have no value on their own. The right to buy or sell the underlying stocks gives options their value.
There’s a lot more to the options vs. stocks discussion…
But I want to keep the focus on why YOU should trade options vs. stocks.
You know how I always say that trading is a battlefield?
Trading is a battlefield & 90%+ of participants leave the battlefield bruised/bloody/dead & it’s due to lack of training & shitty weapons…your broker, your scanning/charting/news software are your weapons/what I teach is your training…so will you be equipped for battle or no?
— Timothy Sykes (@timothysykes) April 28, 2020
Well, options trading is really a battlefield. It’s a zero-sum game. Either you or the buyer (or seller) will lose.
The market’s always determined by the balance of supply and demand. There will always be winners and losers.
But sometimes stock transactions are win-win. Maybe the seller makes a profit that they’re happy with, and the buyer does too.
It’s a bit different for options traders. The advantage of buying options vs. stocks is that you get to see the result before you own the stock.
I want to make one thing clear — I am in no way advising you on when to buy options vs. stocks.
I don’t trade options. I’ve made $7.1 million trading penny stocks.* I’m going to stick with what I’m good at — as should you.
I trade stocks because, for me, they’re simple. There are a lot of ways that people complicate trading. For me, that just raises the bar to entry.
When traders get caught up in complex technical analysis, they can miss the basic truth…
Only price pays.
It still works.
The trading establishment wants you to think that this stuff is harder than it actually is. They miss the old days when commissions on trades averaged $45.
Now more than ever, small account traders have a place in the market. And you can increase your odds by building your knowledge account.
You’re getting a small taste of my teaching approach with this article. If you want to join my Trading Challenge, I’ll ask much more of you.
Trading Challenge students get access to:
- Webinars hosted by top traders. Millionaire traders like Mark Croock, Michael Goode, Matthew Monaco, and I review the day’s best trades.*
- Thousands of video lessons. Search by topic to take deep dives into any pattern or technique.
- Arguably the best chat room out there. Top traders are on call to help create a breeding ground for good trade plans.
My team and I don’t accept everybody. Apply to the Trading Challenge today — but only if you’re willing to put in the hard work it takes!
If you want to trade options, there’s a lot more to learn.
And if you want to talk about options vs. futures, good luck understanding all of the implications … For now, I’ll do my best to keep this simple.
There are two basic types of stock options — call vs. put.
Call options give you the right, but not the obligation, to buy a stock at a specified price. Put options are the sell side of the equation.
This preset price is called the strike price. If the stock goes up by the end of your option term, a call option lets you buy the stock at the strike price. A put option lets you sell a devalued stock at the strike price.
Sounds like a good deal right? So what’s the catch?
Every options contract has a premium attached to it. This is the non-refundable amount that the options seller receives.
There’s also an expiration date on the option and a lot of other considerations…
When you get into day trading options vs. stocks there’s a lot more to know.
If you’re getting your options vs. stocks ideas from Reddit, I want to add some caution to the mix.
A lot of traders treat options like lottery tickets…
If the bet is right, you collect. If not, try again.
Option premiums often exceed what I think of as acceptable risk. Options will either bring big profits or loss of the original investment…
To me, that’s a hard way to build a good trading strategy.
Examples of Stocks and Options
Let’s say stock XYZ is trading at $13…
Want to buy or short it? The price is $13. (Well, maybe you’ll pay $13.02 or more between the bid-ask spread and commissions, but you get the point…)
Whenever you want, you can exit the trade.
Yes, there are a lot of things you should know going in, like whether the stock is liquid enough to exit when you want to…
But at its most basic, trading stocks is relatively easy. Options trading can be much more complicated.
To price an options contract premium, you’ll need to set a strike price and expiration date. The volatility of the stock will also affect the premium.
So let’s say your target stock is trading at $13.09. You set the strike price at $13 — this is called an in-the-money option.
You could sell it immediately and make 9 cents per share … But that’s not a great idea if the premium costs you 57 cents per share.
You could tinker with the strike price, sending it further out of the money. But doing so will likely reduce your chances of making a profit.
Options or Stocks: Which One Should You Choose?
You know that I’ve made $7.1 million so far trading penny stocks.* I start with $12,000 every year to show Trading Challenge students how to build a small account.
That’s nothing compared to what some of my top students have made. Millionaire trader Jack Kellogg has made over $7 million in the last year!* At this rate, who knows where he’ll be when he’s traded as long as me…
When you’re deciding any part of your trading strategy, the best thing is to look at your trading journal for evidence. If you’re choosing to focus on options vs. stocks, the first thing to look at is your returns.
For me the choice is obvious. But the reason I teach isn’t to create clones of me…
I teach so my students have the tools to become the traders they want to be.
I want you to make this decision for yourself … So for this next section, I want you to learn more about top Challenge trader and mentor Mark Croock.*
The Best Options Trader I Know
As I mentioned before, Mark has taken my penny stock patterns and adapted them to options trading. He’s developed a program to teach his strategy called Evolved Trader.
I love his approach … I even guest star in his Evolved Trader Options Bootcamp video!
He’s made over $2.6 million so far, mostly trading options.*
He might have made his millions in a different way than I did, but I think he did it the right way…*
Just like me, he believes that small gains add up. It took him 10 years to get to where he is now … That’s proof of his patience, ability to adapt, and his strategy working over the long term!
Too many options traders think you should go big or go home. With this approach, they mostly go home.
It takes strong DISCIPLINE to keep greed and emotions out of your trading plan. Mark has learned this, to a fault.
I want you to watch this video and hear how Mark grinded his way to learning his own style.
These days Mark teaches in my Trading Challenge … and runs his Evolved Trader program. And he made over $1.2 million in 2020 alone!*
Why trade options instead of stocks? If you want the best argument I’ve heard, check out Mark’s Evolved Trader.
Pros and Cons of Stocks
Let’s start by narrowing this down…
There are a lot of things you can do with your money. You can invest in real estate or trade crypto.
Here we’re just looking at options vs. stock shares.
When you buy stocks, you’re buying a share in a company. This can be bad for a trader…
For example, if the company goes bankrupt and you don’t cut losses, you lose the entire share price. And if you short sell a stock and the price goes up, your loss can be unlimited.
Pros and Cons of Options
When you’re buying an option, your loss is limited by the premium you paid. If the trade goes against you, you lose the upfront cost and nothing else.
When you’re selling an option, you’re responsible for all of the buyer’s profits. This is the risky part — your loss is also unlimited.
But wait, there’s more risk too…
I love trading volatile stocks. But volatility is a different thing when you’re locked into a transaction date as you are with options.
If you want to trade options, you’d better understand the pros and cons of volatility. Lucky for you, I’ve made my “Volatility Survival Guide” available at no cost…
Through four video lessons, I teach the ins and outs of volatility. This is one of the key ingredients in my trading style. It’s essential for understanding the market.
Can I Trade Stocks and Options?
You can trade anything your broker will allow you to. Find a broker that fits your trading strategy first.
Frequently Asked Questions About Options Vs. Stocks
Let’s go to the FAQ and see if there’s anything I missed…
Is Trading Options a Good Idea?
This is a question between you and your trading plan. Options can be part of a smart trading strategy if you know how to use them right.
Are Options Better Than Stocks?
Again, this depends upon your preferences and risk tolerance. It’s always a good idea to paper trade or trade small with new strategies.
When Should You Buy Options Instead of Stocks?
You can use options for hedging against another trade or applying more leverage. It all depends on YOU.
Can You Lose More Than You Invest in Options?
First of all, you’re not investing in anything … you’re only buying the right to make a trade. If you’re the options buyer, your risk is limited to the option premium. If you’re the seller, your risk is limitless.
The Bottom Line: Options vs. Stocks
Options trading is a complicated sub-category of trading…
Like any kind of trading, it can be profitable if you know what you’re doing…
And you can blow up your account if you don’t.
That’s why I stress education in my Trading Challenge. If you know what you’re doing, you’ve already got an advantage over most of the market.
What do you think about trading options vs. stocks? Do you prefer one over the other? Let me know in the comments — I love hearing from my readers!
*These results are not typical. Individual results will vary. Most traders lose money. These top traders and I have the benefit of many years of hard work and dedication. Trading is inherently risky. Always do your due diligence and never risk more than you can afford to lose. I’ve also hired Jack Kellogg, Mark Croock, Michael Goode, and Matthew Monaco to assist me in my education business.
**While Tim Sykes has enjoyed remarkable success trading stocks over the years, his primary income derives from the sale of financial education products and subscription services offered by various businesses and websites in which he has an ownership stake.