You’ve finally found the truth about trading stocks…
Want to learn how to trade options as a beginner but heard it was more risky than buying stocks? In the video below we are going to debunk a few myths and give you some real insight into how trading stock options work. The truth is buying stock is more risky than buying options. But don’t take my word for it, see the examples in the video or the written examples below.
Why option traders have a unique advantage over stock traders…
First let’s discuss how stock traders make money. Stock trading in it’s most simplest form is just buying low and selling high. Ask yourself do stocks always go up and increase in value? The answer is no. The truth is stocks can move three ways which are up, down and sideways. More often than not stocks are moving down and this is where only knowing how to buy stocks can get you into trouble.
Stock traders only have a 1 in 3 chance of making money according to the three ways a stock can move. However option traders can not only make money if a stock is going up but they can also make money if a stock is going sideways and down giving option traders a huge advantage to be able to profit in any market.
Here is why trading stock is more risky than trading options…
Consider the two examples below:
In this example we will go with the ownership of buying stock method attempting to buy low and sell high.
Example one buy the stock: XYZ stock is at $100
You buy 100 shares of stock
Cost 100 Shares * $100 =$10,000
Now Assume stock XYZ Falls $40
Result: Your account is down -$4,000
Example 2 buy the option: XYZ stock is at $100
In this example we will go with the “control” method of buying an option to control the stock for 30 days versus outright buying the stock. Below we use a made up cost of an option of five dollars.
You buy one 100 strike Call Option to control the stock for 30 days at a cost of $5 per option.
Cost 1 contract X 100 Shares X $5 = $500
Now Assume stock XYZ falls $40
Result: Your account is down -$500
Now ask yourself the question “which one is more risky?” Buying the stock and putting your account in a position to lose $,4000 (as discussed in the example) or buying the option and putting your account in a position to lose -$500. See with the option you have to understand that you can never lose more than what you paid for the option.
Essentially when you buy an option you have already determined your maximum risk and maximum loss. Option trading is how most professional traders manage their risk as well as 10X their trading accounts by using leverage and I’m not talking about margin.
There are other cool strategies that you can use with options to control more expensive stocks like Google, Amazon and Tesla for example. It would take longer than this blog post to explain but what I want you to take away from this “the truth;” Trading stocks is more risky than trading options. If you are serious about learning how to trade with options you can check out the course “Options Explained” which breaks down in plain terms how to be smart about trading using stock options.
At the end of the day if you choose to only remain a stock trader you truly have a 1 in 3 chance of making money. Why not increase your strategies with options to have a 3/3 chance.