How is trading options different from buying and selling stocks?
In: Economics
When you trade a stock you are assuming that the price of a given stock will move in your favor. When you trade an option on the same stock you assume the volatility of it’s prices over a given time will move in your favor.
Here is a quick Eli5 illustration :
If you buy a stock at 10 and it then moves to 15 you have made a profit of 5.
If you buy a 1 month option also when the stock price is at 10 making now the assumption the price will move to 15 sometimes during this period you will not make a profit of 5. Indeed for the privilege of assuming a price range rather than cashing out the present value of the stock you will be charged upfront, a volatility price which will come off your only possible profit of 5. Volatility is very expensive particularly for a private investor.
So by now you have understood that, as a layman, you should never trade options as they are an extremely intricate way to bet the market. Prone to heavy overpricing by option sellers.
Either trade stocks (cash) or better do not trade anything and rather invest in what you understand for the amount you can easily afford to lose.
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