Stocks Vs. Options Trading

Stocks vs. Options Trading

There are two popular equity types among retail traders and investors. One is stock trading & one is options trading. Stocks trading is buying or selling the shares of a publicly traded company at a price determined by supply & demand on the market exchange. This is where you might of heard of the New York Stock Exchange (NYSE), the Nasdaq, and the S&P.

Using a stock trading broker, you are able to place orders to buy or sell shares of a company. Some brokers have the feature to also buy and sell options. It is typical to be required to apply for options trading on your broker.

Stocks

Stocks is quite simple when you are comparing it to options. You can buy and sell shares of stock on the market exchanges. You are owning the stock at a specific price. Stocks can be bought or sold during the market hours of 9:30am EST to 4:00pm EST.

There are also exchanges open to buy and sell stocks before and after the market hours, which is called “pre-market” & “post-market” trading. Pre-market trading can be available from 4:00am EST – 9:30am EST. During after-hours trading or post-market, you are able to trade from 4:00pm EST – 8:00pm EST on most market days. It is important to know that different brokers will provide different levels of access to these exchanges.

Options

It is important to understand that options trading is quite complicated for any new trader to dive into. To keep it simple, options are contracts with the offer (but not the obligation) to buy (call option) or sell (put option) a stock at a specific price. Each contract is good for 100 shares of the stock. When you buy or sell an options contract, you are either buying or selling the premium of the contract, which is the cost to own it. The price of the premium is tied to the underlying stock price, date of the contract & the strike price of the contract.

Unlike stock trading, options contracts can only be traded during the regular market hours of 9:30am EST – 4:00pm EST. To learn more about the intricacies of options, we recommend this blog.

Long Stock Position

Buying shares/stock in a company would be considered going long on the position. For example, I bought shares of Apple stock at $100, therefore I’m long Apple Stock.

Short Stock Position

Different from buying a stock, you are also able to sell shares of a company. Not to be confused with liquidating an open long position, selling shares that you do not have a position on is considered “shorting” a stock. With a short position, you are borrowing shares from your broker at a fixed price. In this case, you are looking for the stock to become cheaper, you are trading the stock in anticipation of the price decreasing. You are able to buy the shares back at a different price and “cover” your position of borrowed shares from your broker. If the shares are at a lower price, you get to pocket the difference between the price at which you borrowed the shares for and the price you paid to cover your short position.

Option Long Position – “Call Options”

Going long a stock via options would be considered buying call options. This is buying 1 or more call options contracts where it will increase in value the higher the price of the stock goes. The faster the price of the stock goes up, the quicker the premium of the contract will increase in value. Choosing the date and strike price of the option should be determined by the goal you have for the stocks price to fluctuate within certain levels during a given period of time.

Option Short Position – “Put Options”

Similar to shorting a stock using shares, put options are a short position using the options contracts. Put options trade similar to call options in the likes that they are contracts for rights to buy or sell a stock at a given price. In this case, this is to sell a stock at a given price. If you buy put options, you are paying a premium for a contract where it will increase in value the lower the price of the stock goes. The faster the stock gets to a lower price, the quicker the premium of the contract will increase in value. Similar to call options, the date and strike price of the option should be determined by the goal you have for the stock price to fluctuate to certain levels in a given period of time.

Out of the Money & In the Money

Buying in the money (ITM), you are buying calls with a strike price that is already under the current price of the stock. For example, I am buying in the money calls of Apple stock at $200. The current stock price is over $200, so these calls are in the money.

Out of the money (OTM) is just the opposite. If I buy calls with a strike price above the current price of the stock, then I am buying out of the money calls. For example, I am buying out of the money calls of Apple stock at $400. Since Apple is trading under $400, these call options are considered out of the money. OTM and ITM flips for stock put options. In the money puts are contracts where the strike price of the contract is above the underlying current stock price. Out of the money puts are contracts where the strike price is below the underlying current stock price.

Other Options Strategies

This is an advanced subject and there are a lot more ways to trade options. To learn more about other options trading strategies such as, call debit spreads, put credit spreads, covered call, straddle, strangles, & more, click here.

If you still have questions about stock and options trading, fill out the form below and we will get back to you as soon as possible!

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