Let’s clear up something that confuses many investors: option trading isn’t the same as investing in options. While these terms might sound similar, they represent two very different approaches to using options in your financial strategy.
When people hear about option trading, it often brings to mind images of high-risk bets and quick profits. But is that the whole picture? We’ll find out in this article!
What Is Option Trading, and How Does It Work?
In this section, I’ll simplify what option trading is and explain how it works.
In simple terms, option trading is the act of buying and selling options contracts to capitalize on short-term market movements.
Options allow an investor to pay a small amount to gain economic exposure to an asset’s price changes and/or to receive a small amount to accept economic risk to an asset’s price changes.
For example – If you expect a stock to rise, you might purchase a call option to lock in today’s lower price. If the stock jumps, you sell the option for a profit. It’s fast, thrilling, and—yes—risky.
So, when you’re engaged in option trading, you’re essentially:
- Making rapid, high-levered transactions
- Watching the market constantly for the opportunity to make split-second decisions
- Using complex (and EXPENSIVE!) strategies like butterflies and condors
- Focusing on short-term price movements
- Dealing with higher transaction costs
Think of option trading like street drag racing – it’s exciting but requires intense focus, and split-second decisions, and carries significant risks.
| Summary of the Risks of Option Trading: In a nutshell, these are the risks you should keep in mind. Remember – Option trading is a double-edged sword. Constant Monitoring: Traders must keep an eye on the market every second High Costs: Transaction fees can quickly eat into profits Volatility: Market swings can amplify losses, especially when using leverage So, is option trading worth it? Considering the risks involved, the answer is No! |
The Tale of Two Options Strategies: Option Trading Vs Options Investment
Picture this: You hear Apple might announce a groundbreaking new product next week. Excited by the news, you rush to buy call options, hoping the stock will jump on the announcement. If it does, you’ll sell quickly and pocket the difference. That’s option trading – fast, thrilling, but as unpredictable as betting on a horse race.
You’re very likely to make many mistakes while option trading, the effects of which sometimes can’t be reversed, unfortunately!
Now imagine a different scenario: You own 100 Apple shares at $175 and would not mind owning 100 more if you could get a good price. On one quarterly earnings call, Tim Cook guides toward future revenues lower than the market expects. Apple’s stock price drops and the price of downside option protection on the stock soars in price.
You can sell other investors protection and receive enough in option proceeds that you are effectively buying the stock at a price that lowers the cost basis of your position! You sell short-term options and either make a healthy return on that investment or own more Apple stock at a price you like. That’s investing in options – strategic, measured, and focused on long-term wealth building.
Best Alternative For Option Trading: What Is Options Investing?
Now that you have some context, this section covers how to explore the steady path of investing in options. By the end, you’ll also know which approach suits your financial goals best.
Options investing, on the other hand, looks more like this:
- Taking a steady, strategic long-term approach
- Making calculated moves based on fundamental analysis
- Using simpler strategies that take advantage of the natural directionality of options
- Protecting your existing investments
- Spending less on trading fees
It’s more like driving a reliable car for a cross-country trip – less exciting than drag racing, maybe, but far more likely to get you to your destination safely.
Which Approach Is Right For You?
Ask yourself:
- Do you want to spend hours watching market movements?
- Are you comfortable with high-risk, high-intensity trading?
- Do you prefer steady, predictable returns over potential quick gains?
- How much time can you dedicate to your options strategy?
Most beginners should start with options investing. Think about it – you wouldn’t start your driving career as a street drag car racer, would you? Similarly, it makes sense to begin with more stable, straightforward options strategies before considering any high-speed trading.
Why Consider Options Investing Over Option Trading?
This section explains why beginners should opt for options investment instead of option trading. If you’re new to options, starting with options investing is less risky, easier to grasp, and offers a solid foundation for future growth.
Investing in Options has several advantages:
- More predictable income streams for you to generate regular income
- Lower stress levels, no need to watch the market constantly
- Better risk management
- Less time commitment
- Ability to leverage existing stock positions
- Better portfolio protection as options can be used to safeguard existing investments
TL;DR? Here’s a quick summary for you:
| Options Trading | Options Investing |
| Involves quick, high-risk, high-intensity moves | Involves a steady, strategic long-term approach with calculated moves |
| You are attempting to beat all other market participants to take advantage of a temporary market dislocation or trend | You have a clear understanding of the underlying asset’s worth |
| You need to keep a watch on the market constantly to make split-second decisions | You need not keep a constant watch on the market as the strategies are simpler, and not time-bound |
| The goal is to make fast profits | The goal is to generate long-term, consistent wealth or income with a steady portfolio growth |
| It’s exciting but super risky too | It’s more predictable and stable, so less risky |
| A large percentage of any winnings are eaten up by transaction fees. And losing trades costs just as much as winning ones | Trading fees are low in comparison to losses or gains on the position. The accuracy of your view of the asset value determines the losses or gains |
| Percent returns on successful trades appear high but dollar returns are low without using a lot of leverage | You seek to maximize dollar returns |
| Complex multi-leg strategies (spreads) are used to create a spread position that shields you from excessive underlying asset movement (eg: butterfly, straddles, condor, etc.) | Spreads are rarely used—you focus on one main goal: capturing the underlying asset’s value. So, the approach is straightforward like buying long-term protective puts & adjusting options to match your long-term investment strategy |
| Example: Imagine you hear Apple might announce a new product next week. You buy a call option expecting the stock to jump. If it rises within days, you sell quickly and pocket the difference. It’s like betting on a horse race – fast, thrilling, but super unpredictable. Time horizon is very short—days or weeks at most. Short tenor options are popular, whether buying or selling. | Example: You own 100 Apple shares at $175 and would not mind owning 100 more if you could get a good price. On one quarterly earnings call, Tim Cook guides toward future revenues lower than the market expects. Apple’s stock price drops and the price of downside option protection on the stock soars in price. You can sell other investors protection and receive enough in option proceeds that you are effectively buying the stock at a price that lowers the cost basis of your position! You sell short-term options and either make a healthy return on that investment or own more Apple stock at a price you like. That’s investing in options – strategic, measured, and focused on long-term wealth building. |
| Takeaways: – Requires constant – market monitoring – More technical analysis – Higher risk, higher potential returns – Needs deep market understanding – Quick decision-making – Frequent transactions – Days to weeks timeframe | Takeaways: – Less frequent – monitoring/trading – Lower risk management – Generates consistent income – Protects existing investments – Requires less daily monitoring – More relaxed strategy – Months to years timeframe |
Final Thoughts: Ready to Start Your Options Journey?
If you’re looking to build continuous wealth without the stress of constant market watching, options investing could be your path to financial stability. My course teaches you how to:
- Understand options as a wealth-building tool
- Master fundamental principles
- Make confident, informed decisions
- Generate consistent income through proven strategies
| Tips for Smarter Option Trading and Investing – Understand How Options Work: Learn the basics before diving in. – Set Clear Goals: Know whether you want quick profits or long-term growth. – Start Small: Experiment with simple strategies like covered calls. – Educate Yourself: Enroll in a course to gain confidence and skills. – Assess Your Risk Tolerance: Choose a strategy that aligns with your comfort level. |
So, do not fall for get-rich-quick schemes. Instead, go for targeted courses that help you master the fundamentals of options investment. Financial wisdom starts with the basics!
Here’s what you can do – Start with my free course to understand the basics of options investing.
If you’re looking for a deeper dive – Explore my very comprehensive Fundamentals Bundle to refresh the basics and master the essentials to invest in options. In this course, you’ll learn the strategies that professionals use to build wealth and protect their portfolios via options.
Go on now! Your smarter financial future starts here! Feel free to get in touch with me for more information. We can also discuss your questions or concerns in more detail!