I’m going to break down the complexities and differences between options and trading stocks. First off, stocks are simply one-dimensional trading vehicles, the dimension of “price movement”. For example, you can go long a stock if you forecast a rise in the price of the underlying asset. You, as the stock trader, don’t need to worry about time or changes in volatility affecting the outcome of your trade. You only need to focus on the asset’s price movements.
So now we know that stocks are simple, directional, investments. Now let’s talk about options. Trading options is actually trading three dimensions; time, volatility, and direction. You could say this makes options three times more complex than stocks. Here’s a trading example to compare the difference. Look at this scenario:
A stock takes a full year to move up 10%. If you bought and held on to it, you just made 10%. However, you may have made nothing at all or even lost money if you just bought an option.
So let’s talk about why the option trader lost money even though the stock went up. It’s quite simple; the option trader lost the time value of their options. Each option has time premium as a part of the option price, and if the move doesn’t happen fast, then the option trader will probably lose money if they’re simply buying Calls. The volatility will most likely drop on the asset as the price rises, as well, and this will also cause the price of the option to fall.
Now you see that in order to trade options, we really need to be well informed. Novice option traders usually buy Calls and Puts, and then don’t understand why they lose money when the underlying asset goes the direction they were hoping. It’s important to remember, when trading options, that you are trading a 3 dimensional asset.
Want to find out more about Option Trading? Then visit San Jose Options Mentoring on how to choose the best Options Course for your needs.
Related posts:
- What You Should Know Before Trading Options
- How To Trade Stocks-Learning The Rules Of The Stock Market
- Choose The Trading Stock Options That Are Right For You
- Theories In Trading Penny Stocks On The Stock Market
- A Few Prosper In Bear Markets
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