Tales of a Technician: Stocks vs. Options
January 17, 2022
Today’s video looks at the pros and cons of using stock versus options contracts for your trading and investing.
Notes
Tyler, I have been sitting around thinking strategies. My question is, are options going to make you as big returns as a stock can give?
Answer: Yes, because there is leverage. Buy a call option, you buy stock. Prices rise 5%. Call option value could rise 50%.
For instance. On spreads, you’re limited on your overall gains. It seems with options you’re always making limited gains. I know the argument is that you can get more with options than stock. But can you?
Answer: Limited Reward: Cov Calls, naked puts, spreads.
i) Bull call spread: 100%, 150% if stock only rises 5%.
Unlimited Reward: Long stock, Long call, Long put
If you buy a call option, you’re controlling 100 shares cheaper than if you buy 100 shares of stocks. But head-to-head what are your odds of making a profit on a call option vs stock in the long and short term?
Answer: Probability matters:
A. Buy stock at $70. Stock rises 1 penny, I profit. POP: 50%
B. Buy 70 call for $3. Expiration Breakeven $73. Stock has to rise far enough, fast enough to profit. POP < 50%.
Long-term, Long stock has an edge because you’re not paying for time decay.
Short-term, Long stock has an edge because you’re not paying for time decay.
On a call option, it’s hard to make any kind of profit because you’re having to add on the premium and you must get above all that for any kind of profit.
On a bull put or bull call. Even if you get above your strike price it’s not an automatic profit. It seems options are more of a way to make money in neutral markets and protection for your long stock, like covered calls.
Answer: Today’s risk graph vs. Expiration risk graph
A. Sell 95/90 bull put. Stock is above $95 at expiration.
B. Buy 100/110 bull call. Stock is above $110 at expiration.
And naked puts you have unlimited risk, a stock you don’t.
Answer: Naked puts have unlimited risk until the stock hits zero. Long stock has unlimited risk until you hit zero. Risk on a naked put is actually less than long stock.
Buy 100 shares of stock at $50. Max loss $50.
Sell $50 put for $1.00 credit. Max loss $49.
And to really make money is to trade stocks in a bullish market? I know you’re a huge options trader and I know you have said just do what makes you money but I’m just curious about making a comparison overall. Thanks. I guess I can experiment with trading options vs stocks and see what works and makes me the most money.
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