I was asked this question on why do we trade options when we can buy stocks and sell them at a higher price since we are bullish anyway. So, in this article, there are 3 reasons why options are better than stocks, in 3 different market trends.
1. You can earn when the share price stays stagnant.
Let’s assume you own 100 shares of Apple stock. The current price is $150. One month later, the share price of Apple stays at $150. From an investing point of view, there is no capital gain.
However, during this one month, if you sell a covered call option contract using Apple shares with a strike price of $151, you will be paid a premium. And when the share price closes at $150 on the expiration date (one month later), you will keep both your shares and premium.
Read how the covered call option strategy works here:
How Call Option Works
In another scenario, if you sell a cash-secured put with a strike price of $149 and Apple closes at $150 on the expiration date (one month later), you will keep the premium without having to buy any Apple shares.
Read how cash-secured put strategy works here:
How PUT Option Works
2. You can still earn when the share price drops
Let’s assume that Apple’s share price drops down to $130 because it is hit by its worst earnings report in the company’s history. You will be suffering a paper loss of $20 per share.
While waiting for Apple’s share price to recover, you can still sell a covered call option to earn some premium to lower your average (break-even) price on your Apple stock holdings.
You can read about a reference here:
My Pinterest Stock Dropped Almost 50% But I Am Still Earning Money From It
3. You can use a smaller capital to achieve a greater return when the share price rises.
Using the LEAPS strategy, you can use a smaller capital to simulate the gains of 100 shares. It will require a very huge upfront investment to purchase 100 units of large cap stocks such as Alphabet (Google) (USD$300,000) and enjoy the gains as the share price rises. But with options, you can buy an Alphabet LEAPS with a few thousand dollars and watch the gains magnify as the share price increases over time.
You can read more about how LEAPS work, the strategies I use and some trading references here:
How Does LEAPS Works And How I Use LEAPS To Maximise Gains?
How I Use LEAPS To 10X My Returns
My Biggest LEAPS Options Contract Closed, 173.8% Returns In 10 Days
I Was Laughed At When I Told Them I Bought LEAPS With A Low Delta
I hope this sharing is useful and encourages you to kickstart your options trading journey. It is not as scary as some may think and can at times bring great rewards if we know how to do it well. With the advantages listed above, it may even be a better choice than to own stocks.