Options Trading Is Much Better Than Stock Trading
Options Trading Is Much Better Than Stock Trading
This is an options trading site, so of course we spend a lot of time talking about the benefits of options. I regularly point out the virtues of using options instead of stocks. That should come as no surprise to most people who trade options regularly.
Yet, this isn’t just some theoretical recommendation because of the nature of this site. I actually never use stocks for trading… ever.
In fact, the only thing I use stocks (or ETFs) for is retirement investing. I flat out don’t use stocks for trading, only long-term investing. And, I haven’t done anything differently in years.
So what makes options trading so special?
First off, let me return to that point about retirement investing. Believe me, if I could use options to replace ETFs or stocks, I would. But, there is one obvious limitation… dividends.
Yes, options do expire so you’d have to keep repurchasing long-term options in order to replicate a stock holding. But, that technically is doable if you have the capital. On the other hand, you don’t collect dividends from options, and that tends to be a big part of retirement planning.
Keep in mind, you still can use options in your retirement portfolio. Using covered calls for instance, is a great way to add yield to your portfolio without sacrificing dividend returns.
Just a quick reminder, a covered call trade is selling a call against a long stock position. The trade is maximized if the stock price is right at the short call strike upon expiration. For a refresher on covered calls basics, follow the link.
But what about trading?
Okay, so that’s retirement investing, but trading is a different animal. Unless you want to trade penny stocks (which I don’t do personally), there is never any reason to use stocks instead of options.
Here’s a chart of $AAPL which will help illustrate my point:
AAPL has had an interesting year. It had a big up move early in the year, and a big down move during the August correction. In between, the stock generally moved sideways.
However, if you look closer, you see a lot of choppiness throughout the year. It probably frustrated most stock holders. Moreover, if you bought AAPL at anytime mid-year, you’d be down money. The six-month return on the stock is negative 4%.
That’s where options come in.
If you were trading options on AAPL this year instead of holding stock, there’s a good chance your profits would be outstanding.
First off, AAPL is an expensive stock, and you’d need over $10,000 just to buy 100 shares. With options, you could pay a fraction of that cost in order to control 100 shares.
What’s more, because of the ability to buy and sell both puts and calls, you can design very low risk strategies using options. And, these strategies still have the potential to provide robust returns.
For instance, using covered calls or cash supported puts from February to August in AAPL had the potential to rack up substantial profits (done correctly, of course). That’s a big chunk of the year we’re talking about.
And that’s just one example.
There are literally hundreds of examples, in just about any stock that’s optionable, where it makes sense to trade options instead of trading stock. It even makes sense to use options in your retirement portfolio (along with stocks/ETFs). Essentially, there’s really no reason to NOT trade options!
Yours in Profit,
Gordon Lewis
Options Trading Research
Note: Gordon Lewis has been trading options for more than 15 years and he now writes and edits for Optionstradingresearch.com. You can sign up for the newsletter and get a free research report. We are your go-to source for top notch options trading research.
Category: Options Trading
