Should you buy and sell company stocks or else its options? An individual / retail trader faces this dilemma more than does an institutional trader, given the available capital, risk appetite and regulation. Picking right company remains a vital step ahead of either. Some might argue that trading stocks directly, gives a better sense of involvement in the company than its options.
Options is a form of derivative trade that offers affordable and creative way to own share of the company indirectly and make money on margins. Options have been around since decades, and have different constructs like Call, Put, Butterfly and more. We will look at different factors to consider while making choice between the two.
Available capital: Option of a stock can be purchased at a fraction of its price. (say for e.g. $10 for two options - block of 100 stocks each, vs. $250 for the same stock). If available capital is limited obviously the derivative form gets priority allowing atleast ownership of trade. If capital is more it gives flexibility to engage with the company with more commitment and own shares.
Portfolio: With same amount of available capital an investor can consider purchasing Calls / Puts of multiple companies rather than putting all funds in single company stocks. Thus Options can be used well to distribute allocation and thus hedge risk.
Risk: Options act as a strong hedge in usual scenarios. However, they can also get riskier in comparison to stocks, based on how they are used.
Strategy: For experienced traders, Options act as a tool to define smart strategies of investment and portfolio construction. This is clearly more advanced and should be dealt with only after years of trading experience and positive returns. Stop Loss and Take Profit margins act as intermediate strategies for investing in stocks and limiting loss.
Returns: The percentage return is sometimes more for the same (sum total) stocks owned as Options vs that of Stocks.
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