#48 - Why Trade Options vs. Trading Stocks? Here's 5 Great Reasons
Hey everyone, Kirk here again at optionalpha.com and welcome back to the daily call. On today’s daily call, we’re going to give you five great reasons why you should trade options versus trading stocks. I think this is actually very easy for me to explain, but if you’re new to options trading or if you are trading stock right now and you’re considering trading options, this might be great for you. My top five reasons are the following. Number one is that options give us non-directional trading. Probably the biggest one for me is this ability to trade markets in any direction. I think people actually are surprised when they get started trading options, that they realize that they don’t always have to be long a security, meaning the only way they know how to trade or the only way most people know how to invest is to buy things. You buy this stock. You buy that stock. You buy the indexes. All you can do is buy. But the reality is that you can sell and go short things and you can go bearish on some things and you can go bullish on other things. This ability to be non-directional gives us a lot of flexibility, AKA options (no pun intended) on making money in different market directions. It removes the barrier to generate income when markets are flat or when markets go down which is a huge advantage that traders have over traditional stock investors. Number two for me is this concept of range trading. Again, with stock trading, all you can do is you can buy and you are now fixed at your investment being that line in the sand of where you bought the stock. If you buy Apple stock at whatever price, say… I don’t know what Apple stock is right now, I’m not looking at it, but it’s like $200. You buy Apple stock at $200. If Apple stock goes to $199, you lost money. There’s no distinction. There’s no range that you can make money in unless it’s above $200. That obviously presents its own challenges because there’s a 50/50 shot of Apple going up or down. With options, you can build out strategies that allow you to trade a range. You can build out a strategy that says, “Look. If Apple is trading at $200, I want to profit as long as Apple stays between $180 and $220.” You don’t really care where it goes. If it goes to $205, $195, it doesn’t really matter. As long as it stays between $180 and $220, you make money. That ability to trade a range versus just trading directionally is again, a huge benefit to trading options. Number three is capital exposure. With options trading, you have the ability to do defined risk strategies and control your capital exposure. With stocks, stock is very capital intensive. It requires a lot of shares to actually move the needle a lot in your account. You have to purchase a lot of shares. When you purchase a lot of shares of a stock, you take on a lot of risk. With options, you can basically mimic a stock position with a quarter of the amount of risk or even less sometimes. That’s not saying that you should always be long options and replicate every single option strategy like stock, but I’m saying that stock right now is incredibly inefficient if you want to generate income in your account. I’m not saying there’s no place for it. You could definitely trade stock if you want to. I don’t. I think stock is totally inefficient. I think it exposes too much of your capital to directional moves in the market. I think you can do way better with just options. Number four is that options trading allows for quick adjustments. The only adjustment that you can ever do to a stock position if you don’t use options is to sell out of it. Think about it. If you’re only trading stocks and you are long a stock and you want to adjust your position, what are you going to do? Are you going to buy more stock? That only is going to get you more long if the stock is falling. The only adjustment choice that you have… There’s a one way exit to just selling out the position. There’s no ability to maneuver around it, to sell premium around it. But when you introduce options trading even on top of a stock trade by adding let’s say a protective put or selling a covered call, now you give yourself choices for adjustments that you can make without reducing or eliminating all of your exposure in the market. That’s why I love options trading because it allows you to make quick adjustments. You can quickly adjust a position and totally change the payoff diagram based on new information overnight. With a snap of a finger, you can basically adjust your position higher or lower. You can add a hedge or not or remove it. It’s very, very quick adjustments to the market. In this day in age where the markets are moving insanely fast and information is getting disseminated very quickly, that’s really, really powerful for your portfolio. Number five here is that it adds an extra layer of diversification. When I think about options trading, I think about the ability to have smaller positions in lots of different markets, so that my risk is not covered or basically subjective to one particular market. Now, although we follow the SaP and we Beta-weight to the SaP as our guidepost, we always trade things in totally different markets, things like emerging market ETFs, EEM, EWZ, etcetera, we trade a lot of currency stuff like FXE and FXY, we trade oil and commodities, we trade semiconductors and tech. I mean, it has the ability to very easily through lots of ETFs trade a lot of different sectors and industries, countries, territories, etcetera, so that it adds a wide range of diversity to your portfolio that I don’t think you could otherwise get with stocks unless you traded a couple of shares of each. Now, even if you traded a couple of shares of everything out there in your stock portfolio which would add diversification to your stock portfolio, you’re still going long everything. If everything goes down, you’re still a one direction trader and so, you need to have a different setup in your account. As always, hopefully you guys enjoyed the show today and let me know if you have any comments or questions. But I think this is a great quick list that you can always refer back to if you’re getting on the fence about trading options versus trading stocks. If you have a couple of stock friends or stock buddies that you talk stocks about or talk markets about, send them this podcast. Let them know why they should be switching over to options trading. It would definitely help them because you’re helping them as a friend, but it also helps us grow and continue to reach new people who are just like you. Until next time, happy trading!