Options Article

What are the pros and cons of options trading vs. equity trading?

Last Updated: September 30, 2020


What are the pros and cons of options trading vs. equity trading?

The Advantages of Options Trading

The advantage that investing in equities has to options is the fact that with an equity share, you have ownership in a corporation and all of the rights of ownership, including:

  • Right to vote on corporate matters.
  • Right to transfer ownership in the corporation.
  • Right to dividends.
  • Right to inspect the books and records of the corporation.

You are subject to risks too, such as investment risk, and the risk that the corporation will dissolve or go bankrupt and you will not recoup your original investment.

 With optionsyou do not have ownership in the corporation. The advantages and disadvantages to trading options include:

The Pros

  • Options are strategic investments; you can express any market opinion (i.e., bullish, bearish, slightly bullish/bearish, as well as expanding and contracting volatility).
  • Options provide leverage and when used responsibly, keep more of your trading capital free.
  • If you focus on selling options you can make profits even when you’re “wrong”, i.e., instead of getting paid when the stock goes somewhere you and get paid if the stock stays above/below any level that you predetermine.

​The Cons​​

  • Options are more complex. There are a multitude of technical factors that affect the trade and traders can often spend too much time trying to balance conflicting criteria in their strategies.
  • Options expire. Therefore, to stay fully invested there is constant work required by you as the trader. We try to simplify this work with our software.
  • Options can easily be misused, and many talking heads on TV and the internet give poor advice.

Options provide a different way to profit from changes in the market price of a corporation’s stock but they themselves do not give you a stake in the corporation. Concerning risks associated with options, you should always read and carefully consider them before investing in any options contracts.

RELATED READ  Why do Traders Care About Implied Volatility Rather Than Historical Volatility?

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