Stocks and options may have some similarities, but they are two different types of investment, especially when it comes to their risk-reward potential.
And while stocks and options can be worthwhile investments, each performs better in certain situations.
Choose stocks when…
You Know Enough About Stock Investing
The stock selection process requires in-depth research and proper analysis, but choosing options will need more than just data.
Before you can even select options, you must first apply for trading options and be approved. You can only start choosing options and placing orders to trade them once you receive the approval. In addition, you would need a margin account and considerable capital to qualify for options trading.
That’s why mutual funds or exchange-traded funds (ETFs) consisting of various stocks make a better choice than options, particularly with beginner and even some intermediate investors.
You’d Rather Not Follow the Market
Stocks need to be monitored from time to time, although the amount of time you need to keep an eye on them is usually less than what is required by options, which have set expiration dates.
They’re Volatile
It can be pretty easy for options to be out of the money (OTM) and expire worthless if you’re rooting for a particular stock that’s quite volatile. Investing in stocks can provide you with a permanent stake, but you need to survive the ups and downs, and that’s often unlikely to happen with options.
You’re Aiming Long-Term
Stocks typically make significant gains in the long run, although the journey ahead will not be smooth sailing. That said, options’ short-term nature is more against your favor during tough times in the market since they can expire before stock prices start taking the optimistic route again.
Choose options when…
You Seek Higher Returns
Like stocks, options offer a high-reward potential. Still, keep in mind that such a benefit also carries a serious risk with it. While options could amplify your potential returns twofold, threefold, or even more, you’re risking losing a lot. And that could happen in the span of a few weeks or months.
So if you plan to buy options, make sure you are in a financial position where losses from trading options can be managed and will not easily drag your capital down should your trade goes wrong.
You’re Looking to Earn an Income
Some investors sell call options against their stock positions or write put options to generate income. These strategies provide a good and pretty low-risk way to trade options.
You Want Buy Stocks at a Discount
Using options to purchase stocks can help you hold shares at a discount. Instead of buying a company’s stock directly, you can sell a put option on the stock, which lets you set a price you’re willing to pay for the stock.
Moreover, you immediately collect premiums for selling put options, which you can trade to make an additional profit for your account.
You’re an Experienced Investor
Options can be risky and complex investments that first-time investors should avoid, at least until they have enough knowledge and an excellent idea of what they are doing. Active traders seeking flexibility may also find a suitable candidate in options.
