As we mentioned, options trading can be riskier than stocks. But when done correctly, it has the potential to be more profitable than traditional equity investment or can serve as an effective hedge against market volatility. Stocks have the advantage of time on their side. Options trading requires a more practical approach than investing in stocks.
You may want to exercise the option before expiration, and that means you'll need to keep a close eye on the price of related shares. You can set up alerts through your online broker. Historically, equities have outperformed most other asset classes over time. While it's possible to make quick profits through stock trading, in general, it tends to take time to make the biggest profits.
Deciding if stocks or options are best for you is a completely personal decision, based on your investment style. The inability to play low when necessary practically forces investors and forces them to enter a black and white world while the market is trading in color. Options can help advanced investors limit their downside risks and are usually used to complement a stock investment strategy. Call and put options are attractive to investors only if the market for those options is liquid enough, which means that options can be easily bought or sold.
Now that you understand the different roles that stocks and options can play in your investment portfolio, hopefully it becomes clearer that trading stocks and trading options requires two different sets of learning tools and skills. Stocks offer high-risk, high-reward potential, while options move up a couple of levels, with the possibility of doubling or tripling your money (or more) with the risk of losing everything, often in a matter of weeks or months. In general, options trading is the responsibility of the active and practical trader looking for short-term profits. You need to understand the company you plan to operate with, and that certainly requires a lot of time and effort.
But no broker has any rules against investors buying put options to play bearish, and this is a definite benefit of options trading. I also learned that options are a type of insurance and that no one makes money (in the long run) buying insurance. It's probably very rare for you to know exactly when a security will move a substantial amount (3% is substantial) and exactly when it will happen, unless you trade with inside knowledge (which could lead to a prison sentence). The first thing I learned the hard way (trying my luck in real options trading) is that liquidity matters.
However, it is important for the individual investor to know both sides of the story before making a decision on the value of the options. The second thing you need to do is understand risk, both in general for options trading and specifically for each trade you place. In most cases, it's important to consider investing in stocks as a long-term investment strategy, since, over time, stocks will help your portfolio adjust naturally to inflation, as well as offer the potential for future returns.