Options can be less risky for investors because they require less financial commitment than stocks, and they can also be less risky because of their relative impermeability to the potentially catastrophic effects of gap openings. Options are the most reliable form of hedging, and this also makes them safer than stocks. 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. 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. Owning shares is the easiest and most common way to invest money.
However, call options can help you reduce your portfolio's downside exposure and earn attractive returns with relatively little initial capital. Read on for a brief overview of options and stocks and how they differ. That's an important advantage to options trading, as it allows you to reduce or neutralize risk in your long and short stock trades without having to close the trade or stock position. Options trading can have a greater potential for losses than trading stocks, because you are betting that the price of a stock will move one way or another.
In addition to the reasons listed above, there are more reasons why trading options is better than trading stocks. Stocks with a limited public interest or that are traded on over-the-counter markets are less likely to support an efficient options market. In addition, some options strategies are riskier than others, so make sure you understand the trade beforehand. For everyone except advanced investors, stocks are probably the better option than options at all times, but an easier way to buy them is through stock ETFs.
Options trading requires you to learn a new vocabulary of terms such as put, call, and strike prices, which may lead you to believe that these assets are riskier than stocks. When you invest in stocks through a self-directed account, such as with Ally Invest, you decide which stocks you want to buy (or sell) and how many shares and you can execute those trades on your own. So, if you want to hold a long stock position, but the stock is going down, you have only two options. While stocks are generally more expensive than options and can lose all their value, options expire worthless after specific dates.
On the other hand, if you are more of an active and practical trader, then options might be something to consider. A stock has an indefinite life and continues as long as the company exists and continues to be listed on the stock exchange.