subject: Simple Stocks Vs. Complex Options [print this page] I am sure that at this stage of our discussion, you are asking yourself how stocks trading differ from options. Well, this article will give you a view of the complexities of options and how it varies from trading stocks.
With options, a trader has to consider all of the trading dimensions discussed earlier. Thus, price, time and volatility are the three dimensions consisting options. Now, to give you a more profound comparison between options and stocks, take into account the following setup:
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.
A stock has to course through a full year long period to move up 10 percent. The trader who invested and held on to this particular stock gets a clean 10 percent from this trade. For an options trader, this trade will give him nothing at all or even waste his money if he simply just bought an option.
Simply because of Time Decay an option buyer will lose money in this trade. As the trade takes a long time to develop, one's option just lost a significant amount of Time Premium. Moreover, Call option will likely lose value as the volatility of the underlying asset might have probably gone down. In short, options will be losing premium through the course of time.
If well understood, options can be very adaptable and gives investors the freedom to be creative in their trades. I can assure you that once we go deeper into understanding options, such investment vehicle can truly make money in any market scenario.
