Home > Investing Articles > The Difference Between Stocks And Options

The Difference Between Stocks And Options

Todays Date: November 12, 2018

In today’s issue of Talk Wall St. by San Jose Options we are going to discuss the differences between trading stocks and options. First, let’s talk about stocks. As most investors know stocks are directional vehicles. If the price of our asset goes up, we make money. If the price falls, we lose money. Well, that is true if we are long the stock. If we are short the stock, then we can make money when it drops. Anyway, whatever your position is on a stock, it’s directional. One direction we make a profit and the other direction we lose. With stocks, we don’t focus on time or volatility in the markets, we just worry about the way the price is moving…up or down.

Options, however, involve these other two dimensions just mentioned, plus the dimension of price as well. So options are actually three-dimensional trading vehicles based on price, time and volatility. To compare stock and options in a practical sense, let’s consider this scenario:

A stock takes a full year to move up 10%. If you bought and held on to it, you just made 10%. However, you may have made nothing at all or even lost money if you just bought an option.

So let’s talk about why the option trader lost money even though the stock went up. It’s quite simple; the option trader lost the time value of their options. Each option has time premium as a part of the option price, and if the move doesn’t happen fast, then the option trader will probably lose money if they’re simply buying Calls. The volatility will most likely drop on the asset as the price rises, as well, and this will also cause the price of the option to fall.

Now you see that in order to trade options, we really need to be well informed. Novice option traders usually buy Calls and Puts, and then don’t understand why they lose money when the underlying asset goes the direction they were hoping. It’s important to remember, when trading options, that you are trading a 3 dimensional asset.

Want to find out more about Option Trading? Then visit San Jose Options Mentoring on how to choose the best Options Course for your needs.

http://financearticledirectory.com/wordpress/wp-content/plugins/sociofluid/images/digg_32.png http://financearticledirectory.com/wordpress/wp-content/plugins/sociofluid/images/reddit_32.png http://financearticledirectory.com/wordpress/wp-content/plugins/sociofluid/images/dzone_32.png http://financearticledirectory.com/wordpress/wp-content/plugins/sociofluid/images/stumbleupon_32.png http://financearticledirectory.com/wordpress/wp-content/plugins/sociofluid/images/delicious_32.png http://financearticledirectory.com/wordpress/wp-content/plugins/sociofluid/images/technorati_32.png http://financearticledirectory.com/wordpress/wp-content/plugins/sociofluid/images/google_32.png http://financearticledirectory.com/wordpress/wp-content/plugins/sociofluid/images/yahoobuzz_32.png http://financearticledirectory.com/wordpress/wp-content/plugins/sociofluid/images/mixx_32.png http://financearticledirectory.com/wordpress/wp-content/plugins/sociofluid/images/twitter_32.png http://financearticledirectory.com/wordpress/wp-content/plugins/sociofluid/images/jamespot_32.png
Comments are closed.