Every found yourself wondering what the difference between stock options vs stock is? Trying to figure out which one would be better to trade? Enjoy the following read!
Photo courtesy Chris butler project options
Stock-options-vs-stock can seem pretty difficult at first, BUT Stocks are easy! Basically, You pick a business that is listed on the stock market, check the price and trade it if you so desire. (Based on whatever strategy that you are using, trading and risk rules. )
You can pick as many of these shares as you like! There is no time decay, no expiration dates, no greeks to deal with nothing. So its much less complex than option trading.
Up top you see ticker symbol: AAL ( American Airlines).
What is The price? Currently its $17.03/ share. You can buy as many of these as you want. DONE!
But options? Not so fast...
Stock options vs stock differences now were onto to the options side!
1.) Options control 100 shares at a time~ You don't own them, you control them.
2.) Options give you either rights OR obligations
3.) Options operate by using strike prices~You choose the strike price.
4.) Options also have expiration dates~ You're in control of choosing the date.
5.) Profit and loss differ depending on whether you bought or sold the option.
OPTIONS are a CONTRACT....that means there is an agreement between you and the buyer.
Think of the contract as a piece of paper that binds you to an agreement...
if you believe the stock price will go up, buying "a Call option" (Call agreement) would give you the RIGHT to buy 100 shares (but you don't have to buy) / stock at a certain price that you chose based on the strike price you chose...
So Ex: Apple- $100 stock price*, you believe it will be worth more in the future because they keep coming out with new phones! You buy a call option. The next day, Apple jumps to $105! Your call option gave you the right to buy 100 shares of Apple at $100 a share!
But, who wants to do that?...
Instead, you sell the contract! +$5 x 100 shares= $500* profit ( there is more to it than this).
When you are selling options, you are obligated to do something. You made a deal. A promise so to speak. What kind of promise?
1.) If you SELL a CALL= (To be safe, make sure you already own 100 shares of this stock). It means You promise to sell your 100 shares at a certain strike price that you chose! Example: I sold the $15 strike call on AAL. I am promising to sell 100 of my AAL shares by a certain expiration date, if the stock stays above $15.
2.) If you SELL a PUT= This means you promise to buy 100 shares of a particular stock for whatever strike price you chose. Example: If you sold the $15 strike put, you promise to buy 100 shares of that stock if it fell below $15 by a certain expiration date.
----- In BOTH scenarios, you will get paid a credit for putting on this trade---
Are you starting to see the difference between stock options vs stock?
EXPIRATIONS DATES: You are in control of choosing your expiration date for trading depending on whether youre buying or selling options.
STRIKE PRICE: You get to choose your strike price. This number will dictate what you will be able to buy or sell your 100 shares for.
OPTION CONTRACT MULTIPLIER: Options run in 100 share batches. So when you buy a call for example, you have the right to buy 100 shares of X at the strike price you chose. If you sold a put, you have to buy 100 shares of X at the strike price you chose.
Now youre beginning to see the vastly different world between stock options vs stock. Its crazy! But its so worth learning :)
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