I get the question all the time – what is the difference between stock trading and stock options trading?
Well, picture this. Stock trading can be compared to gambling at a casino. You’re always gambling against the house, so if you and your fellow gambling friends have stuck some luck, you all win.
Whereas trading options can be compared to gambling at a race track. Each person is betting against the other people betting, while the track gets a small cut for providing the facilities.
One thing to remember is that stocks give you a small piece of the company, while stock options are just contracts that give you the right, but not the obligation to buy or sell the stock by a specific date.
It all comes down to two things: leverage and choice.
In stock option trading, you can use leverage to your advantage. It can enhance your returns while minimizing risk at the same time.
You only have two choices when trading stocks – buy and sell.
For instance, if you buy a stock at $10, that price is your base line to profit or lose money. You profit if it goes higher, you lose if the stock plummets.
The key advantage to trading stocks is time. You have the time to hold your stock and profit on it when it exceeds that $10 mark that you bought it at – no expiration.
The disadvantage of this is that you must outlay for the entire position. If you buy 100 shares of stock, you’re fronting $1,000 from your pocket. It’s capital intensive and you now have $1,000 of real risk on your hands.
Trading stock options on the other hand gives you more options. You have the ability to formulate a strategy based on how the stock option is playing out. Is it rising? Falling? Getting a bit higher before it comes down a few points? Benefit from its trends.
One example is this: If you buy a bullish option at $12 strike price, we can make money is it rises higher than $12 any time before the option expires. We would make the difference between 12 and wherever the stock is. Instead of outlaying that thousand dollars like we did in our previous example, we might be able to control one contract (100 shares) for only $50 (I’m using easy numbers for this example by the way). If we control 100 shares (or one contract) at a $12 strike price and the stock goes up to $14, we have just made a $200 difference in value, based on our $50 value.
This is just a basic example of one of the opportunities with stock options.
DayTradeSPY focuses on trading one stock option – SPY. By doing so, we minimize the risks that come with trading stocks and we have mastered our strategy on trading this one stock option.
Hugh W. Grossman, Head Trader at DayTradeSPY.
Hugh Grossman is the founder and Head Trader at DayTradeSPY and uses his vast experience to teach his methods to make consistent daily gains trading SPY options. Join Hugh in his interactive Trading Room to see how he regularly pulls in the profits!
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