How do you decide whether to buy the stock or the option when making an investment?
Best Answer
380 points
SirCrashton answered one year ago …
My objective in investing in the market is to generate a consistent, on-going income. Because of cost considerations I used to trade options almost exclusively until I discovered that my crystal ball was defective.
I have had much greater success, particularly in this volatile market, by buying stock in large cap companies having solid fundamentals in growth sectors---stock prices tend to be relatively stable and they are better able to recover from short term corrections---and selling calls against them at a strike price higher than what I paid for the stock, but ideally no more than one strike price out of the money to generate a high premium. I set a stop-loss limit to minimize the damage if the stock were to take an unexpected plunge. My goal is to make 3%-5%/month.
If the stock price doesn't move or declines at the option expiration, I keep the premium and the stock and sell another call for a forward month. If the stock gets called away, I don't care: I profit from the sale and the option premium. At that point I look into purchasing stock in another company and repeating the process.
If I were to get stopped out and lose my covered position, I might buy back my option for pennies on the dollar before expiration if I had any reason to believe that the stock would recover enough to become a liability against my uncovered situation.
Answers
119 points
wiseone answered one year ago …
Most people who talk about investments are long-termers who want to hold something for quite some time. Most people who do that are usually old-timers who think they are " safe " if they invest in a good comany or like SirCrashton they may be engaged in covered call programs ( he, I note, is prudent enough to use stops since some of these beautifes slide fast ). A very close friend of mine lost much of his retirement fund when he owned a large block of a famous bank and was not nimble enough to sell out before it lost 40% of its value. All, all stocks have risks - many of which you cannot perceive. So, if you recognize that everything is a trade, you may want to consider buying options ( they sell puts too, you know, ) if you have a sound directional opinion about a company and its near-term prospects. Buy options with enough time to avoid rapid decay of premium and try to use in the money options. Most brokers will take stop-loss oders on options now. Use them.
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2172 points
ChaosNantuko answered one year ago …
I would use stocks for long term trades, and options for short term trades.
For short term trades, options offer you the leverage to make more money faster. I use almost exclusively option spreads that benefit from time decay, so the standard problem of it being a "wasting asset" doesn't apply to my option trading. Given that, i find its better to use a trade that makes money over time, and makes money as it goes in the right direction vs a trade that only makes money if it goes in the right direction.
Its much less practical to use option spreads for long term trading, so i would use shares of the company instead of options in that situation.
202 points
Lobo answered one year ago …
To write/sell a put with strike price equal to the the price you have already determined you are willing to pay for the stock, and using an expiration date maybe 45-60 days ahead has allowed me to buy at a "discount" to the market price--most of the time. If the market price of the stock is below the put's strike price at expiration you will buy above the current long price, yet you will have the premium from the put sale to soften that irritating event. In today's market many good stocks are beaten down and appear to have limited downside risk. Anyway, you would have the stock you wanted at the price you were willing to pay.
Of course, if the stock rises to a price above your put's strike price no one will force you to buy their stock at the strike price. You would not get your stock as soon as you might have preferred, but you have your income from sale of the put to throw into the higher stock purchase price if you still want to buy it. The premium on the put will often more than cover a lot of common fluctuations up or down...unless the stock you want to buy is very volatile, or your chosen stock gets hit with unexpected good news or bad news, etc. Generally, if your chosen stock's chart shows trading in a narrow range, I recommend you look at that buying method. You will be chosing the length of time until expiration, the strike price, and whether the amount of the put premium is worth the wait. If your stock is not particularly volatile, the put will not yield as much upon its sale. There are indeed many variables. I simply think it is possible to net a few dollars. 'A few dollars' multiplied by the number of put contracts, etc, can be delightful to a little guy like me.
