Stocks vs. Options: Which One to Trade
If you are buying and holding a stock, you only have to get one thing right: Is this a great company?
You get that right, and 50 years from now, that stock could be helping you pay off your mortgage and paving the way for your retirement.
But with options, we have to do more work upfront.
We could see gains as quick as 244% in five days, 259% in just over two months or 288% in just under three months. These are three of the absolute best returns my readers have had the chance to rack in over the years, because options give us significant leverage compared to stocks.
But as I said, it takes more work at the outset. The tricky thing is that we have to be right about three things — and whether it is a great company has nothing to do with it.
When you trade options, you have to answer these three questions:
- Which stock is heading up/down?
- How high/low is it set to move?
- How quickly will this move play out?
If you know all three, with a high level of confidence, options can maximize your returns in just days or months depending on how quickly you expect the stock to move.
It’s more work. But by taking the risk to get those three questions right, we can achieve a much greater reward with options.
That’s the dilemma most people face.
Not many investors are willing to put in the work, even though the rewards are out there every single day.
But there’s one loophole that does all the work for you…
You Need a Strategy to Maximize Your Gains
I’m talking about following a system.
The best ones are simple strategies that you can prove in different types of markets — bull markets, bear markets, sideways markets — and it will continue to rack up gains.
Most strategies only work in bull markets. It’s easy to make money when everything’s going up.
But when you find a system that works in bear markets too, then you have yourself a winner.
My favorite approach with options is my Quick Hit Profits strategy.
We’ve gone over the most important part of it before, my Profit Trigger.
While I’ve spent time to perfect this approach and find a short list of fewer than 80 companies that have the best returns, the foundation of my approach works all over the markets.
According to market data, stocks that have reported earnings that beat analyst expectations by at least 5% and whose stock price also jumps more than 5% on the news have a tendency to rise roughly 60% of the time.
That’s winning 6 out of 10 trades, with only four losers, by simply following this Profit Trigger across the markets.
Winning more than losing is key to profiting with options over time.
Now, these price trends can seem rather small. The stock could be going up maybe 5%, 10% or as high as 20% in a few weeks after reporting earnings. And if you only trade stocks, that’s the kind of return you can expect.
But options offer us the opportunity to turn a modest 5% move in a stock into a 50% profit. Or a 10% move in a stock into nearly a 100% gain in the option in as little as 30 days on average.
Are Options Worth the Risk?
The gains are tempting, but you can also see sharp losses.
Remember, options give us leverage that can turn a modest move in a stock into a solid profit.
But when stocks begin to fall, a 5% loss on the stock would translate to a bigger loss in the option, too.
Here’s how it works.
With an option, one contract controls 100 shares of stock for a fraction of the cost.
For a $50 stock, you’d need $5,000 to buy 100 shares.
But we could trade the option for less than $500. That’s just 10% of what you would have had to invest to control 100 shares.
When you buy the option for $500, the most you can lose is $500. That would be a 100% loss.
Now, if you owned 100 shares of the same stock for $5,000 and it fell just 20%, you’d lose $1,000 — or more than double the cost of the option.
As long as you understand how options trade, you can actually use options to lower your overall risk.
Overcome Losses and Unleash Options
This is why I don’t like winging it when it comes to trading options.
When you follow a profitable strategy, it takes the guesswork out of the equation.
Every time a stock hits my Profit Trigger, it helps me answer those three questions: Which stock? How high? And how quickly?
I’m ready to put on a trade right away and get in position to profit from the expected move.
Part of trading the market means that not every trade is going to be a winner, and I’m OK with that.
Because I know I still should have more winners than losers. But my winners can run much higher … to gains of 244%, 259% or even 288% in less than 90 days.
All I have to do is stick to my strategy.
I’ve already done the hard work in developing this profitable approach. It wasn’t easy, but it was worth it.
And today, you can take advantage of a special offer so that you’ll be able to jump into my next opportunity.
We have a great way to get started with Quick Hit Profits. Click here to watch a short video I pulled together about this unique offer that’s only for readers of Weekly Options Corner.
Next week, we’ll look at in-the-money versus out-of-the-money strike prices with call options to determine which one is the best to trade.
Chad Shoop, CMT
Editor, Quick Hit Profits
P.S. We hope you all learned a lot from our QCOM trade. We hope to bring you more sample trades like this in the future.
In the meantime, we received this lovely note from Brigitta K. (edited for length and clarity):
“I was hesitant to try the option when you first recommended it… I finally took the plunge and bought one contract on December 11 at $6.47. I sold on January 8 at $12… Great recommendation for a learning experience! Definitely looking forward to more education.”
Great job, Brigitta! We love hearing from our readers.
How did you do on the QCOM trade? Write to us at WeeklyOptionsCorner@BanyanHill.com.