Options vs stocks

Discussion in 'Trading' started by innovest_11, Apr 27, 2007.

  1. Newbie to option.

    - cost little to buy a lot of shares (contract)
    - since bought so much, risk is higher
    - some stocks options not so liquid, so spread is high

    But if let say i intend to just buy 100 shares say intc $22, cost $2200
    If i buying one contract $17.5 intc option for $2.5 cost $250,

    Am i right to say if intc goes down to $21, my option will also go down to $1.5, so now my contract only worth $150?

    So basically the risk is quite the same, for stocks and options, but much higher risk if i buy more options, which costs less, yeah, that's what option is about, leverage, just want to confirm my thoughts.
  2. You should read up more on options, there are more to them than simply leverage.

    Options aren't just vanilla long calls/puts, if you treat them as such that means you have to right on multiple things on the trade, such as:

    Direction of Price
    Extent of Price Change

    Options are all about timing.
  3. Start with stocks cause in the end if you cant trade them what chance do you have with options?
  4. Lucrum


    Good advice IMO.
  5. =========================
    innovest, true;
    even if new.

    Partly true anyway, but much more complex than that;
    much different risk[stocks /options] in certain types of trends.

    But actually one of the most amazing patterns in all of trading is overleverage [stocks & options ] of the new;
    thats true.

    If the timing is right on a good move [not that many good moves];
    less risk in options,
    but mostly there in is an advantage for one side:cool:
  6. Pita


    True and false at the same time. You need to know the stock first thats of course very important.

    Lets say you have a good sense for market moves and instead of buying the stock you buy an option at or a bit out of the money. You calculate the risk you would be willed to take in the outright stock and from this amount you calculate the size of your option position. The stock meets your entry signal and you look for an entry in the option. When chosing slightly out of the money options your risk is smaller than your risk is with the stock because that option contains only value of time to expiration and volatility. So managing that trade in the option like you would manage the trade in the stock (stop violation) and exiting it in case of a losing trade will cost you less as the option will still have some value. Considering that the trade moves into your favour and gets in the money, it will start to move like a future.
    Lets say once in a while your option doubles and you exit half of your position and just leaving a mind-stop for the remaining contracts. Your are entirely free of risks, dont need to watch the stock anymore and can let it run until expiration without using margin. The stock the sooner or the later will kick you out either due to stop running intraday or because you might have trailed your stop.

    So all in one you reduce risk, you dont use margin and need much less money than you would for trading the stock while having multiple times higher leverage. Risk is never more than the purchase of the options cost you when entered, which means you are safe in case of big gaps against you and rich in case it happens to your favour.

    Knowing the anatomy of the stock, chosing the right option no matter how much greek it can talk, calculating your risk in advance and thats the best, safest and most profitable kind of trading you can do.

  7. It's a good thing you start by looking at the risk.
    Otoh, you buy the option because you want to sell it higher. While waiting for the stock to rise time goes by, after a week or so, the option will be worth 2.25 or only 2.00, even if the stock stays at $22. You didn't mention the strike of the option but the stock must be a strike+$2.5 just at expiration just to break even.

    It's not that simple.

  8. I don't know who your broker is but if its not etrade then you can still go to their site and and look under research and enter a symbol and go to options chains for the stock, click on the contract symbol for the options chart

    they have daily charts and 1 and 3 month options charts for free and you can do some research on how options move, pretty nice for free, I have an account with them so the options price moves real time but for research at night I don't sign in just flip thru the charts. I haven't found any good free options charts sites but etrade is not bad

    the best thing to do is compare the options chart to the stock chart and dates and see what happens when

    pull up the dia chart and compare it to the indu

  9. https://us.etrade.com/e/t/home/aboutus

    this link takes you to the reseach area
  10. You are vastly oversimplfying here. Options as well as futures have expiration dates which makes timing on directional bets , long or short, important. Time decay can work against you which is how most new option traders lose money per time decay on the buy side. Again I am simplifying, make sure at minimum you understand the concept of delta and theta before you trade any listed options. Your thread may be in the wrong area; there is a whole section on options if you scroll down. Read through the threads to get an idea. Good luck with your trading. :)
    #10     Apr 27, 2007