Options Vs Stocks

Options VS stocks, which one is best for you? This Get rich quick people looking for big gains will tell you options are the best. Longer term individual who can wait will tell you stocks are better than options. But what is the best way to invest your money in the stock market? Each of them has an advantage and a disadvantage over the other.

Options have higher leverage than stocks. Say you find a stock that you thought would be a good buy. You buy it at $50 and a month later you sell it for $60. Not bad a 20% increase in 1 month. Now say instead of buying the stock, you bought the $50 call option for $5. When the stock went up to $60 you sell the call for $10. This gives you a 100% increase in the same time frame.

With this extreme leverage working for you the option defiantly has a greater profit potential than the underline stock. It is what makes those traders who earn several hundred percentages off their money every year able to do that.

Now before you go out and buy options on every stock you think might go up let's look at the flip side. If options can make you huge returns they must also be able to deliverer huge losses. If the stock above went from $50 to $45 your options could be worth $0. When you invest in an option you have a max loss of 100%. If you would have invested in the stock instead you would have only lost 10% of your investment. That doesn't hurt you nearly as much.

Another advantage of buying the stock is you have a long time for something good to happen. When you buy an option it expires at a certain date. If the strike price of your call is higher than the price of the stock by that expiration the call expires worthless. If you owned the stock however you have eternity for the stock to go up. It doesn't matter what the stock does in the near future as long as it goes up in the long run.

Still the temptation of unlimited returns drives many investors to become purely option traders, and rightfully so. A few good option trades can have an enormous effect in your account. Probably the best thing to do is to have a mixture of both stock and option plays. Designate a large percentage of your account to stock plays and a smaller percentage to the high risk high reward option plays.

Everyone will have a different opinion on this. If you don't feel comfortable trading options, don't. If you want to make the big returns in option plays try it, just be prepared for the risk.

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