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Hey, this is Sasha Evdakov.
This week I want to look at stocks versus options and give you a quick little run down behind the differences. We've been talking a lot about options recently because we have the new course that was released for option trading. I guarantee it's going to be one of the best option trading courses that you've taken out there that you can find.
It's world class, and I highly recommend that you get it. That's one of the reasons that I want to cover more about options and stocks.
If you're starting, you might not know the differences between options versus stocks. Also, you might not be aware of the advantages and disadvantages.
Maybe you don't know what things to look for when you're getting into trading one or the other. When you're getting into this, there are so many different things that we don't have time to tackle every single little detail. We don't have time to cover everything when it comes to options versus stocks.
There's a lot of differences. But I will cover some of the main essential points in this post. That way you can do some further research and some more digging regarding the subject matter.
A few Announcements Before We Start
Before we get started into this week's lesson, I do have a few announcements.
If you were interested in a coaching session, I now have a couple of quick little clips from some of the other people that have done coaching sessions with me. That way if you're interested what it's all about it'll give you some insight there.
In addition, remember we do have the options course that was released. You can go to Rise 2 Learn and take a look at the Options Mastery a Business of Options and Verticals.
You can hit the learn more button. This is a massive lesson here.
We get into:
- what each module covers
- the details between the modules
- you also get the sample footage
If you're brand new to options, I recommend you also take a look at the foundation course. It sets up the proper foundation to make sure you can handle this course. You don't have to get it, but I recommend it simply because I don't want you to be lost within the class.
Stocks versus Options - Let's Start
Take a look at the stocks versus options and some of the differences.
This is our quick summary that I want to do, and then we're going to go into a few of these details as we get into the lesson.
When it comes to flexibility, we have only two ways that a stock can trade:
- you can only trade it to the upside
- you can trade it to the downside
With options, you can trade it in many different ways, and there's a thing called profit picture. You can trade an option to the upside. These are profit pictures - it tells you where you make or lose money.
You can even trade options if you believe the price is not going to move. There's a lot of variations or even to the downside. You can trade them in a lot of different ways. Much more so than stocks. There are much more variations when it comes to trading options.
Pattern Day Trade Rule
When it comes to stocks if you have a margin account, it's a T+3, which means you got to wait three days for clearing on your stocks or your positions.
With options, if you have a cash account, it's a T+1, which means the only way one day for the clearing. You can call your broker more about that, and they'll explain all these things.
Cost & Fees
When you trade stocks, it's more. When you're trading stock, it's typically $5-$10 a trade. With options, you can do per leg. Sometimes if you're trading complicated spreads, it can be cheaper. It could be $1-$2 per contract.
It could be less if you know what you're doing and if you're more active in trading. But with stocks, it's typically a flat rate. Sometimes you can get cheaper costs like with Interactive Brokers if you're doing a low quantity of shares.
That's possible because they charge based on the number of shares and not a flat rate.
You get dividends with stocks. This is a great thing. With options, there are no dividends. That's a bad thing if you're looking for dividends.
You have probabilities when it comes to options. It's easy to see them, and you can dissect them pretty simply.
When it comes to stocks, there are probabilities, but they're more internal to you based on technical analysis in your evaluation. You do still have probabilities, but you use them differently. It's more complicated with stocks, but you can still do it. With options is easier.
Difficulty to learn
The next thing is the difficulty of learning. It's easy to learn to trade stocks. I'm talking about the ease of the mechanics, the terminology, and the way it works.
Not easy and in the sense of learning how to kick a ball or something to that effect. But it's much easier than trading options. Options are tough and challenging because you have to learn a lot more.
There's a lot more going on behind options. We're talking about learning to understand them. Let's say learning stocks is a 4 and learning options are right up there with a 9-10 if we look at it through the scale of 1 to 10. When it comes to options, you have to put more time into it to learn.
Most people lose a smaller amount or a lower percentage in stocks. And they lose much more when it comes to options. That is because they don't know how options work. They don't understand options.
In general, it should be the other way around. But the majority of people lose a smaller amount in stocks because you can hold them for a more extended period.
This is where we get into the time factor. If the stock pulls back, you can wait and allow it to catch up.
Whereas with the options you can lose if you don't know what you're doing. Now with options, if you know how time value works this can be used as an advantage.
For many traders when they're getting started this works against them. If you become a good options trader, this can work for you.
It can become a benefit. And that's why this one can flip-flop between one or the other. That can be the case depending on your experience.
Amount You Can Make
Finally, the last thing that we're going to cover is the amount you can make. In general sense with options, you use less of your capital to make more of a percentage. And you can make more money.
Of course, there're different risks involved, but you can make more money. The main reason is that they're typically a leveraged vehicle. Whereas with stocks, you usually make less.
- Now, do I always trade options?
- Do I always trade stocks?
It depends on:
- what you're doing
- the risks
- the profile that you have
What type of account because of tax consequences. It depends on what you're doing. But, in general, you can make more with options.
The reason is they're leveraged based on the amount of income that you have. When you start getting into this, and you compare options versus penny stocks, they're a lot more closely related to the amount you can make.
From my standpoint, I'd instead trade options than I would penny stocks. Anyways, that's a personal take.
If you're wondering what is the amount you can make it comes down to experience. On options, you have a higher rate of return based on the capital that you have. That's because it's a leveraged vehicle.
Take a Look at Trading (thinkorswim platform)
The first thing that we're going to look at is flexibility. Here's an Apple and if we buy Apple and analyze this trade, we can see this.
You can see you have this sloping line that goes up and down. This tells you if the stock goes up, you make money. If the stock goes down, you lose money.
If you short the stock (this is your other opportunity), it goes the other way. Then when the stock goes down, you make money. And if it goes up, you lose money. That's because you're shorting. That is all you can do with a stock.
As we go into the option spread, you can still do that. Let's buy a single, and you can always make money to the upside. So you can see I'm making money as the stock moves to the upside. The white line is your current (today) line.
The thing is options expire with time. The green line is what happens at expiration. If I went the other way and I did a put you can see now in this scenario I'm making money to the downside.
That's because I'm trading a put which you can see is indicated down there. In either case, you have these two variations like a stock. You can also trade other more complicated spreads.
I can trade a vertical. I can buy a vertical and share with you some of these concepts. As that stock heads higher, I'm making money like a stock to the upside. But then once it gets into this safe zone and if that stock stands still, I make free money. That's because of this Theta. In a way, it's free money because of options decay and deteriorates.
That way I'm making that additional cash - 75 cents a day. And this white line continues to get closer to that green line. That's what happens. That's one variation.
As long as it gets into that level, I continue to make some money. Let's do a calendar, and you can create another spread where it's more non-directional. As we go into the 120 strike prices, you can see if that stock stand still I make money.
If it goes down a little, I make money. And if it goes up a bit, I make money. When we start looking at this profit picture, you can see a white line is my current line. And as it gets closer that line continues to get higher every day by 59 cents.
- Why is that?
That's because I sold the current month the December month and then I'm buying back for protection the January month.
The ones in January expire slower than the ones in December. You can see the flexibility behind. Тhere's a lot more things you can do, and you can get even more creative behind this. But you can see that there's so much more flexibility when it comes to options. With stocks, you only have upside or downside. That's about all you can do.
Example of Pattern Day Trade Rule
The next thing we talked about was the pattern day trade rule. If we look at the pattern day trade rule, this one is simple to understand. It's a T+3. Usually, when you trade stocks pattern day trade rule, you have to wait three days for clearing after you make that trade.
For options, you have to have a cash account. For this - T+1. Otherwise, it's still for three days. With a cash account, it's a T+1. You only wait one day for clearing. In theory, you can trade more.
I won't tackle that too much because if you're under $25,000, you probably shouldn't be trading that frequently. Take your time on it, but that's about as much in detail as I'll get into it. You can have a one-day clearing.
Example of Costs
These are two contracts. If I confirm and send you can see that right here, they're margining me about $3.
I get discounts on my trades and so forth. You might have the same rates as I do. You might have better rates you might have worse rates. Anyways everybody's rates are negotiated depending on how active of a trader you are and how much you're trading.
Here I'm paying a $1.50 per contract on this account. If you go into stock and you buy a stock, you can see this stock this one is $9.95 per trade. Now, we're in the simulated trading, and in reality, in this brokerage account, I pay about $5 in the Interactive Brokers. I don't even know, and it's a lot cheaper if you're trading less than five hundred shares.
It depends on the broker and on what you're trading. It's crucial for you to know that if you're trading a large sum of shares (5,000) it's better to look at a broker that's a flat rate probably and that's it. However, there are other brokers that charge per hundred shares or per share, and then after a hundred shares, it adds up to a certain amount.
In either case, depending on the type of trades that you do or what your trading sometimes it's good to have 2-3 brokers. And you can decide some trades are great for options for that broker. Maybe that broker is great for trading a low quantity of shares. Perhaps another broker is great for a lot of shares for penny stocks. It's all on you to decide.
It's vital for you to look at that. In general, you can get some pretty good rates when it comes to options. That's the case because of these rates that you can get. Whereas with a stock sometimes you're paying $5, $10, $15 for some brokers. But with options, you can usually get some pretty good rates only if you're trading small contracts.
Dividends Through Example
You're not going to get the dividends when it comes to options. There are no dividends because it's a contract. When it comes to stock if you're trading things like Apple, Verizon you're going to get your dividends.
If you're trading options on specific stocks, you're not going to get a dividend. Because it's an option contract, that means you have no voting rights. If you're thinking about voting, but most people don't vote anyway.
That's because they're holding that stock for a shorter period. With options, you don't get a dividend if you're holding it for three months, six months, a year. You don't have a dividend.
With stocks, you do have that dividend. If you're trading the SPY and you're holding it for a year or five years you're getting your dividend.
If you're holding on to Verizon, you're getting your dividend. If you're looking to buy and hold it, you're not going to get a dividend. That means if you're a person that wants to buy and keep things for a long time probably better off with a stock.
In that case, you get your dividend, and you don't have that time value.
What about Probabilities?
This is one thing I like about options. Take a look at Google. I change my value, and I can go to option theory, and then I go to the probability of in the money.
Now, I have probabilities that got changed on the right, and that got changed on the left side.
They gave me percentages. I have these percentages that we're given that are based on the probabilities of these things working out in the money.
Google now had earnings. If you take a look at it it's after hours we're bouncing about $9 up. In either case, if we're looking at Google and I decided to buy $880 contract or $870 contract, it tells me the probability right there.
With 870, the probability is 13.89%. It tells me the probabilities for December. If you want a higher probability, you're going to pay more money.
However, it's a higher probability of it working out in your favor. The same is true is if you're going into selling contracts.
You have a 10% probability working out if you're doing the put side. If you're buying the put, you have a 10% probability. The flip side is real.
Here we have:
- one contract
This one, the inverse of that 700, we have 10.92%. Opposite of that call 90% chance of its success. You can see if the stock stand still I make money. If it goes up, I make money. Even if it goes down a bit, I make money.
My chance of success on this is 90%, which is pretty high. I'm putting up a lot of capital on this. And that is because it's a naked strategy. But in general, you can see it's a $700 contract.
That gives it a 10.92% chance of working out if you buy a put. However, if you sell the put, it's about a 90% chance of success. You have probabilities when it comes to regular stocks.
However, the problem with regular stock probabilities is you need to understand how technical analysis works:
- ABCD patterns
- the volume
- price spread
- the behavior
- the price spread
All those things you take into account, and now this creates your probabilities — the more things in your favor, the higher the probability that you have. With stocks, you still have the probability. But it's more about your evaluation of probability. It's not an exact calculated probability as you do with options.
With options, I like the probabilities that we have. However, with stocks, you don't get those probabilities that are a direct number.
That's one of the significant advantages when it comes to the options. You got the numbers for the probabilities, and with stocks, you have to do it yourself.
How Hard Is It To Learn - Difficulty
I talked about stocks being pretty easy. It still takes a long time to get profitability. To get to profitability takes a long time in both of these instances.
When you're looking at learning general concepts or understanding how things work, the stock is a lot easier.
And when it comes to options, it's much more challenging to learn and understand how they work how they behave.
You have four parts to the trade:
- you have a buyer and a seller when it comes to the calls
- you have a buyer and seller when it comes to the puts
Now you start getting into weird and creative strategies as well for risk management. It's a lot more complicated. Whereas with stocks you have upside and downside. You have a buyer or a seller.
And that's it.
There are a lot fewer things to learn and understand when it comes to trading stocks on their own. If you're a basic investor buying the SPY, for example, it's much easier to trade the stocks.
The thing is options are more involved. There's more about volatility and Theta. You have to learn about time value. As you look at this position and you start evaluating you have Gamma, Theta and Vega.
You have all these things. And you also have the volatility, the implied volatility which is in part the Vega. Vega is the volatility of what you have. But you have the implied volatility that happens in the market that affects the option prices.
It's a difficult concept to understand all these things. My point is not to teach you about volatility in this lesson but to realize that there are more elements when you're trading the options.
Whereas when I compare this to stock, all you need to worry about is the Delta. That is the stock moves up or down.
It's pretty easy to understand. For every dollar move, I make $500. If $1 goes up by one, I make $500 if it goes down by one I lose $500. It's pretty simple.
Understand the Losses
This can flip-flop back and forth. If you're looking at stocks specifically for many people, they lose a lot less on a percentage basis in stocks. That is because when you look at a stock, you can hold that stock for a long time if it has a pullback. You can hold that stock for quite a while.
Whereas with options if you let that thing sit and stand still, you're losing every day, in this case, $13.97. That's a lot of money that starts to add up and imagine doing that every single day every single week.
That continues to add up. You want to be in that seller of options and constantly be making money. Rather than losing money, but for many people, it's a lot easier for them to understand it on this concept of calls and puts.
But unfortunately, you lose money every day. Many people lose more on options than they do on stocks. That's because with options they get out. Whereas with a stock you can hold on to and let it climb back up.
What About Time?
With stocks, you can wait. With options, you can lose. But in certain instances, you can make more money from options with the time value.
This is Google, and we're selling a naked contract four of them at the 700. If it stands still you make $55 per day from that stock.
If it pulls back and then stands still you still make $55 per day at your maximum amount of $840. That stock can stand perfectly still, and you make your $840. It doesn't matter where it ends up as long as it's above 700. That's all you want.
This is where you can make time value work in your favor. I'm not recommending this trade obviously because you might be reading this post sometime in the future.
You're not taking into account your risk. I'm showing you hypothetically if it stands still you can make $55 every day. That's the case as long as it's above $700.
That's the way options work. And if you understand how time value works (in your favor), rather than with a stock it has to move one way or the other. With an option, it doesn't always. Sometimes it does, but it doesn't always.
How Much You Can Earn?
Here's the amount you can make on stocks versus options on your capital amount. This is one thing that people are always asking.
- Can you make more with options or more with stocks?
In reality, it doesn't matter. It matters more about your trading style and what works better for you. If options trading doesn't work, then don't trade options for you.
You can make money with options, and you can make money with stocks. But if it's not the right approach for you, then you shouldn't be doing it.
Options are leveraged, and in theory, you make more with options. Let me share with you how this works out.
Take a look at Google. Here are 100 shares.
- What is that going to cost you?
If you look at our current price 805 and we multiply that times 100 you get your total value of cost is $80,500 to be able to put on one hundred shares of that.
With an option contract, I can put on a vertical, and I'm going to sell a put vertical. I'm not recommending you do this. It's just to compare.
Let's put on about $80,000 worth. Here we're at about $80,000, and I can even go even tighter if I want. You're going to tell me that with the stock you can make unlimited money. If the stock goes to 840, you're making $3274.
But it has to move to 840. With an option right here if it goes to 840 looks at how much I'm making - $11,842.
That's because I'm 42 contracts on this trade, which means times a hundred because each contract controls one hundred shares.
In either case, when you're looking at it here, you're making 840 at $12,000 on these contracts. Here on $80,000, you're controlling 4200 shares of stock. You're leveraging up into the position. If that stock goes to 840 looking at this, you're making $12,000 on these options.
Whereas here with the stock 840, you're only making $3319. Of course, the upside if you go to 1600 in the stock you're making $80,000 in the stock.
That's a huge difference. You're making $80,000, but the chances of that stock to go into 1600 is almost unbelievable. Think about it doubling in a stock. How many stocks are above a thousand? Not many, I mean Priceline and a few others.
But in general, when you're looking at it $80,000, that's double the stock price. Whereas here if you're trading the option on this vertical if you get to sixteen hundred the maximum you can make is $25,000.
It doesn't matter if it goes to $3,000 a share you'd still only make $25,000. If you're talking about realistic movements, you're looking at 840 $12,000 - on $79,000.
And here the stock stands still and you make money even if it pulls back twenty points and then stands still. As long as it's above that 780, I could still make $25,000 on $80,000. If a stock goes down to 765, I'm down $4,000. Granted, with the options if it happens within a day, you're down a lot more because of that leverage as I mentioned.
With time you can move time forward and that way you can see that white line gets closer to the green line. That's what happens to these options. You can leverage up and make more. That's what it comes down to. These are the advantages and disadvantages of these kinds of trades between stocks and options.
A Quick Summary
The flexibility of options is way more immense versus stocks. You have more you can do. Pattern day trade rule if you have a lower account, you got to wait three days on the stocks with a cash account or margin account. With options, you have to have a cash account, but you can wait one day for the clearance.
Costs and fees typically it's more on the stocks. And a little bit less on the options. When it comes to dividends, you got the dividends in the stock. If your dividend person stocks are the way to go. When it comes to options, they don't have dividends. But you could sell monthly premiums. That's the whole point behind options.
If you look at probabilities, you got to look at stocks more in detail for the internal technicals. Whereas with options you can see probabilities easier.
The other important thing is that stocks are way easier to learn. If you don't have the time commitment for it, stocks are way easier to learn. Options are way more challenging to master. You need a lot more time to learn options.
When it comes to a loss percentage, most people, in general, will lose less with stocks. That's because they can wait and hold on to it. However, as you get better time-value can be used in your favor with options, and you can do a lot better. And then this can be a lot less on your losses.
The last thing is that you can make way more with options. That's because of the leverage factor that we discussed and talked about.
I hope that makes a lot more sense when it comes to stocks and options. We've covered a lot of things here on screens. These are the basics behind stocks and options. And you need to find what works for you because there's a lot of different trading styles. They all work, but not all of them will work for you.
I mean, look at sports players. They all make money professional sports players in their industry. However, not all of them can play badminton, basketball or tennis.
You have basketball players who play basketball. You have football players who play football or soccer players who play soccer. They all do and focus on their specialty. The same thing is in trading.
We all trade, but we have our specialties. For me, I don't trade Forex and commodities. My thing is stocks and options is the way to go.
I also like trading indexes. But you might be different. You might also like more penny stocks. You might be more of type a dividend trader or some other kind of trader. It's essential to find your match and what works for you.
You have advantages and disadvantages. That's the way it works. If you want to learn more about stock and options, take a look at Rise 2 Learn website and find this course - Options Mastery #2: Business of Options & Vertical Spreads. I highly recommended it, and it's world-class material.