The Difference Between Stock and Option Trading

By Donald Scott

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.

So we all know that stocks are simple, directional investments, but what about options? Well, trading options is actually trading 3 Dimensions...time, volatility and direction. I guess this makes options three times more complex than stocks. Now, let's look at a trading example to compare the difference. Look at this scenario:

A stock takes a full year to move up 10%. The stock trader who bought and held on to his stock has just made 10% on this particular trade. However, the option trader might have made nothing at all or even lost money if he just bought an option.

We know why the stock holder made money, but why would the option buyer lose money? Everyone thinks there is leverage in options, and it's true, but in this case, the leverage didn't work out for 2 reasons. One, the asset took too long to move, so the option time value decayed. Secondly, the asset moved up, causing its volatility level to fall, and this also helped the option price to move down.

This is why we need to be educated in order to trade options. Simply buying Calls and Puts makes option trading very difficult because of the elements of time and volatility. Remember, options are three-dimensional vehicles, and if we don't understand how to manage these 3 complexities, we shouldn't trade them. After we understand options more in depth, these investment vehicles can make money in any type of market. Options are very adaptable and allow investors to be very creative once the understanding is there. - 23200

About the Author:

Want to learn a Stress-Free Method of trading options? Get our at www.sjoptions.com and learn the strategies that are changing the lives of other investors each day.