Stock traders and investors who aren’t familiar with options are leaving opportunities on the table! Learn the key differences between stocks and options.
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When trading stocks vs. options, there are differences in terms of:
1) What you own
2) How much time your trade has
3) The different ways to profit
4) How easy it is to lose money
5) How much you can make
6) Taxes
Stocks represent part ownership of a publicly-traded company. Options are financial instruments that derive their value from the stock’s price relative to the strike price, time to expiration, and volatility.
Stock positions never expire (unless the company goes private) and can be held forever. Options have expiration dates, creating time limits for all positions.
Stock owners can make money when the stock price increases or a dividend is paid out. Short stock traders make money when the stock price falls.
Options traders can make money in a multitude of ways. Buying calls and shorting puts will both profit when the stock price increases. Market-neutral strategies like selling iron condors make money when the stock price remains in a range. Overall, options traders have more flexibility in how they can make money.
In terms of losing money, stock investors can only lose all of their money if the stock price goes to zero (the business fails). Options traders can lose all their position’s value if the stock price is above/below a specific price at the expiration date. It’s easier for options traders to lose 100% of their position’s value than a stock investor.
While riskier, options give buyers the ability to make outsized returns compared to the stock’s return. In the video, I gave the example of AAPL falling 21% while a long-term AAPL put option grew 230% over the same period. The potential of bigger returns than the stock price is what draws many traders to options.
Since most option positions will be held for less than one year, all gains will be taxed at the trader’s short-term capital gains rates. Stock investments are commonly held longer than one year, dropping the taxation to long-term capital gains rates.
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Disclaimer: Nothing contained in our content constitutes a solicitation, recommendation, promotion, or endorsement of any particular security, other investment product, transaction, or investment. Trading Futures, Options on Futures, and retail off-exchange foreign currency transactions involve substantial risk of loss and are not suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment. Opinions, market data, and recommendations are subject to change at any time. Past performance is not necessarily indicative of future results. I am not a financial advisor. The ideas presented in this video are for entertainment purposes only. You (and only you) are responsible for the financial decisions that you make.
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