I sometimes look at non-options traders/investors as absolutely foolish. Of course, not all of them are, but if I told you that you could make a 15%-30% return on your risk and the underlying stock or ETF you wanted to invest in could go up, down, or sideways, wouldn’t you want to trade options?
Of course, there are risks and trade-offs. As we all know there are no guarantees in the investment arena. But when applied correctly, you will learn that options trump stock any day of the week.
Options traders do not view the markets as binary (long or short). An options traders determines not only his or her specific bullishness or bearishness , but also chooses a specific probability and risk tolerance with each and every investment/trade.
The bottom line is that I think stock traders are truly at a disadvantage.
Stock investors really only have one, maybe two choices when it comes to investing direction: Buy a stock or go short.
Another characteristic that stocks have is that they don’t have an expiration date like options. Yeah, I know, most people think this is crazy because how could something that expires be better than something that will live in perpetuity. Well, many stock traders become married to their positions, they don’t have an end to the trade, they just buy it, it goes up, then hold it, then it drops down, hold it, it becomes a horrible losing trade and they continue to hold it some more.
The missed opportunities alone are enough to drive me insane. The thing is that when used properly, options force traders into thinking about the future in more details; they are also forced to think about risk and reward and set a true time horizon to their trades, hopefully compelling them to have a superior plan, which is a good thing.
When you buy a stock, you have a 100% of that stock’s price times the number of shares at risk at all times! In certain options strategies, you might have one-tenth of that or less. Granted, some traders are foolish and risk just as much on one options position as they would in one stock position. Leverage can be a wonderful , but when abused, it can really hurt.