What are the pro's and con's of investing in options vs. stocks?
We would like to hear an original discussion and debate as to which is better.
Best Answer
175 points
ricTICros answered one year ago …
Options can be safer than stocks when used properly and offer several advantages.
1. Less cost. To buy 1000 shares of a $50 stock you need to put up $50,000.
You could probably buy 10 6-month options for $5-7000, and put the rest of your money in a high-yield savings account reducing your options cost. If the stock rises 50% you'll probably make about $20,000 on the options vs $25,000 on the stock - but your profit will be 300% (plus income from the money put in savings).
If the stock drops in half you lose $25,000, but with options you lose only what they cost you, and you can lose even less by covering them as the stock starts to drop.
2. With options, you can buy the stock cheaper by SELLING puts with a strike price at or below the price of the stock; if the stock never drops you keep the money from sale of puts. If it drops and you have to buy the stock, you have it at a cheaper price than h.ad you bought the stock outright.
3. Or you can have it both ways. But a couple of hundred shares of stock and also sell the puts. If the stock rises you at least gain some of the move plus your put money. If the stock drops you don't lose as much as if you had just bought more shares, and meantime you still have most of your money in savings.
4. As still another strategy which won't make you a fortune but will almost guarantee a profit, do a Buy-Write. In other words, with a $50 stock, you simultaneously buy the stock and sell a leap at a strike well below the current stock price. For example, you buy stock at 50 and simultaneously sell a two-year leap with a 40 strike for 15-20. Since you receive the option money right away, your actual cost for the stock is 30-35. If the stock is called, you have a 15-20 profit. If the stock isn't called you still have the stock and option money.
Answers
3943 points
MNSL answered one year ago …
Unlike stocks options has higher risk. Options and derivatives are like weapons of mass destruction because of their high risk factors. If you trade options without an understanding of volatility you will end up with your value of investment worthless. On the other hand stocks have fewer tendencies to become worthless unless company becomes bankrupt and not trading their stocks. If we are long term investors we do not want to worry about recurrent market fluctuations. Do you think investors like Warrant Buffet and Peter Lynch will sell their stocks during market downturn? I do not think so. They will add more to their portfolios and will take above average returns in the long run. I have not heard about Buffet trading options. Still he is richest person in the world. Stocks investments are more disciplined than options.
In option market when there is a fluctuation in the market traders have to take quick decision to minimize their losses. You find so many exit points stop order etc in options due to nature of higher risk. You find more losers than winners in option trading. Most of the times option becomes worthless. In addition, it brings instability and speculative nature to the market. We must not forget history teaches us most of market crashes happened due to trading of complex derivatives such as options. These instruments bring volatility to the market. Some corporations can not make their long term plans due to price fluctuations in the market.
In case of individual it is always better to invest in stocks. Large investors including institutions and hedge fund operators have research houses, more information and large capital base to take advantage in option and derivatives trading. They can get big positions in trading derivatives such as futures options market to influence the market irrespective of demand and supply.
If you invest in stocks you do not want to know complex trading pattern like option trading. If you can identify correct stock with long-term growth and potential you can get above average returns continuously. In option trading you always bet the market that it is going to go up or going to go down etc. For example everybody wants to buy put option and reverse index fund against stocks in DOW. What about if market goes up like last two days? These option traders will lose their money.
If you are expert in stock investment you can do day trading as well. If you have little bit of knowledge of technical analysis you can enter and exit during slow market period. In a bull market you can invest for long term. It is always better to invest in stocks for the long run to take above average returns. If you are really want to increase you investment value you can get facility of margin trading to maximise your profit in stock investment.
Overall stocks have less risk than options. Stocks do not become worthless as options. Stocks are easy to understand than options. It is always better to invest in what you know and what you can understand easily. You will never lose your money. Losing money in option trading is very much higher. Only complex investors make money. Other all investors lose their money. I can remember I have read some great books written by great investors like Peter Lynch. In those books you always see following:
You must always invest in what you know and what you can understand easily. You must not follow herds and Wall Street research. If you can identify quality, neglected and less known stocks at the early stage of their growth you can get above average returns in the long run. In this sense stock has more benefits. You can have good night sleep as well. If you trade option we have to waste lot of time as well. Because it is short term oriented. Almost all the time we have to be alert to verify market direction.
1130 points
sundarkambam answered one year ago …
1. Stocks = You are part owner
Options = You have a contract to buy / sell at a specified price by a specified date
2. Trading Stock = Price raises, all people win.
Trading Option = You win and the other guy loses. It is a zero sum game
3. Expiry Date = All options have an expiry date, Stocks expire when the company buys them back or when the company winds down.
4. Price = Value of the options is dependent upon the value of the stock.
5. Time = With time , the value of good stocks appreciate whereas value of option declines with time.
6. Professionals = Options are only for professionals who really understand the various technicalities involved. One can tailor options to suit the risk and rewards which one is expecting from dealing in them.
896 points
jillybeansisme answered one year ago …
KUDOS to sundarkambam and MNSL. Options, like commodity futures contract trading, are extremely risky and should not be traded by the masses despite the fact that there are many "experts" out there who offer their "research and trading advisories so you can make a fortune without the financial investment that stocks require".
I do disagree with one statement that MNSL made:
Overall stocks have less risk than options. Stocks do not become worthless as options. Stocks are easy to understand than options. It is always better to invest in what you know and what you can understand easily. You will never lose your money.
You can lose your money in stocks. It happens every day. You should invest in what you are comfortable with and never put all your eggs in one basket.
435 points
larryat36 answered one year ago …
Options are an excellent way of trading ONLY if you get an education and know what you are doing. If not please do not try it as it can lead to disaster.
Read more from larryat363943 points
MNSL answered one year ago …
Actually what I wanted to tell was options are more riskier than stocks. I should have gone through my answer again. Thank you jillybeansisme for highlighting my error. Yes if we invest carefully we will not loose our money in stocks. Options on the other hand we are betting against market go up, go down and go side way. So we know how much risk involve in options when we compare with stocks. Option also bring more volatility to the market.
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2183 points
ChaosNantuko answered one year ago …
Its all in how you use the tools given. Stock options gives you options. Theres effective ways to play the upside, play the downside, even play a sideways ,market. With some basic technical analysis, options have the potential to make far greater returns then stock does.
Many people worry about options being riskier then stock. Yes, it is more risky to spend $50000 on options then it is to spend $50000 on stock. However, in most cases, its less risky to CONTROL $50000 worth of stock using options, then actually buying the $50000 worth of stock directly, yet the profit potential is very similar in both cases.
Many people say options can be used only for speculative purposes, and while they are very good for those purposes, that isn't all they can be used for. Buying options that don't expire for a couple years, and then rolling them to the next month (selling the old option, and buying an option with a later expiry date as it becomes available) is one way you can invest for the long term (10+ years) using options. And if the stock would've went up a lot during that time, the options should do at least as well.
As for the prior comment about Warren Buffet not trading options, its not true. I remember reading somewhere that berkshire hathway is in fact the largest holder of stock options in the united states. I wasn't able to find the source, but i did find an article about how berkshire hathway was buying options of a company. http://www.reuters.com/article/marketsNews/idUKN0544820120070905?rpc=44
This article also details how he sold long-term put options on a set of indexs.
http://www.iht.com/articles/2006/04/03/business/buffett.php
Another way options are LESS risky then stocks is that if you use certain options strategies, such as covered calls, ITM vertical spreads, and even calendar spreads to a certain extent, you are profitable if the stock goes up, if the stock goes sideways, AND if the stock goes down slightly.
Buying stock, you are only profitable if it goes up.
This is how i see it.
Stocks are more easily understood. There isn't nearly as much terminology, you don't have to have a very specific time frame for the movement of the stock, and even if you make big mistakes, you won't lose much. You can make money on the way up, or the way down, and you don't have to worry so much about volatility. Depending on your broker, you can get margins of up to 4:1, allowing you to vastly improve your profits if you know what your doing. The biggest caveat is that in a sideways market, profits are likely to come much slower.
Options are more difficult. Theres a lot of complicated terminology, you usually need to have an idea of how long the movement of the stock will take (although not always. you can roll long term call options to farther out months indefinitely). If you make a big mistake, you can lose your whole investment, and not just stock movement, but stock volatility is relavent to whats happening. On the plus side, you can make trades that make money no matter which way the stock moves, as long as it moves enough (great around earnings time), you can make trades that make money if the stock doesn't move at all, and you can make high-probability trades that are significantly safer then simply owning the stock for that duration (think covered calls). With options, if you know what your doing, the potential returns are much greater, the potential risk can be lower, and once you understanding everything, using options just makes sense when investing in the stock market.
