Advantages and Disadvantages of Options Trading over Stock Trading

We have been trading stocks and options for a number of years and since 2006 trading Forex exclusively, it has been an exciting adventure. We know what it’s like to be a novice in the trading world. You will be able to hear The Good, The Bad and The Ugly. Nothing will be withheld and no stone will be left unturned. There is a section on trading psychology and why mastering this aspect is one of the most important aspects of being a trader.

The work involved in trading involves educating yourself on how to trade a workable strategy, keeping your emotions in check, not getting too excited when you win, and taking charge when you have your inevitable losing trades. If you don’t trade consistently with a plan or strategy, you are not a trader but a player.

Advantages of Stock Options Trading

o You can make money in a static or declining market

o You can trade with higher amounts of leverage (ie you don’t need as much capital to start).

o You can use more complicated and sophisticated strategies to protect your money and earn more money.

o Can be used as an ‘insurance policy’ to cover a position

Disadvantages of the options

o Not good for long term trading (buy and hold)

o You have to learn how to pick stocks and then also learn options trading strategies

o Stocks may move in the direction you predicted, but you may not make any money yet

o Have a limited life (the option expires at a certain time)

o In order for you to win money, someone has to lose the same amount you have won (although some people may like this aspect of options)

As a trader it is important to have some understanding of how options work, however we would caution against trading options if you are just starting out in your trading career. As mentioned above, we only trade Forex and there are compelling reasons for this which we will discuss.