In this post, we’ll take a look at why stock traders may want to consider adding options into your overall trading toolbox.
One of the biggest reasons for having options versus stock is lower it costs using AAPL as an example.
We can see AAPL stock closed at $113 per share.
So 100 shares would cost you $11,300 to get into that position.
An AAPL November 100 call, with very similar exposure, as being long 100 shares of stock only cost you $13.50 per contract or $1,350.
You can see the overall cost of the option versus a stock is much much less, because that overall cost is less the risk is lower.
The risk on options versus stocks doesn’t have that kind of defined risk feature that options.
Option loss is limited to the initial premium paid in the case of AAPL.
The maximum loss you could have would be $1,350.
Obviously, exposure up to $11,350 per share on AAPL if it does go bankrupt.
Certainly, the likelihood of Apple going bankrupt is small but let’s all remember stocks can, have and do go bankrupt.
One only has to look at Enron and Lehman for classic examples.
One of the biggest reasons traders gravitate towards options is so you can get in and lever up.
The more aggressive option players certainly like the fact that they can have less money at risk and have greater overall return as an example.
We look at Apple close at $113 110 percent up in Apple would put the stock at 124 30.
Obviously, if the stock moves up 10 percent your stock gain would be 10 percent.
However, if you got that November 100 call you’d be looking at an 80% gain in Apple.
That call that we paid again going back that we paid a little over 13 dollars for 13.50 contract would be worth at a minimum 24 30A contract which equates to about an 80 percent gain or even might be a little time premium on there as well.
But certainly, this is the big reason that options players like to use options and their overall trading approach.
And I think the combination of combining stock trading along with options trading depending on kind of your viewpoint on the magnitude of the move would indicate whether it’s better to go with the stock or go with the option.
Certainly stock from an investment standpoint options are a great trading tool.
And I think the biggest reason from my trader perspective why I like options Overstock is more choices options are adaptable options you can basically pinpoint your specific exposure so you have different strike prices and options.
You have different expirations you can get you to know a lot safer if you want. You can go further out in time.
You can do spread trades where you can basically construct the trade that specifically fits your price time and volatility viewpoint remember options are a curve not linear right.
So options as you’re right you’ve become more right as your long you become less wrong.
This is a great feature of options so what’s the downside which is always a good thing to ask time decay.
That’s really the tradeoff for all these big advantages of options right.
The big drawback is the fact that if nothing much happens right options will lose more money than being along the stock.
So it’s a tradeoff between leverage a term called gamma versus time decay a term called theta.
That’s a kind of a risk-reward tradeoff between the good part of options and the bad part of options.
But for stock traders out there looking to add another tool to their toolbox certainly considering options especially if you’re looking for those explosive moves or if you’re looking to use the other side of it by selling some options doing some covered call strategy.
So again options can be kind of bought and sold. You can maintain a bullish position by doing a covered call that will reduce your risk. Let’s still let you have that bullish overall exposure and have time decay working for you.
So options provide a level of customization that you really can find with stock.