Options vs. Stocks

Since the financial debacle, US companies have been managing to improve their bottom lines. You can attribute some this success to better execution with the help of technology and process improvements. But if that were true, then we would not have seen the worldwide labor deterioration. Furthermore, we would have had a much faster recovery led by re-hiring efforts. So, companies are meeting bottom line goals by managing labor costs. So I argue that the success of corporations has so far largely come at the expense of their employees. Companies are testing the limits of unit labor elasticity to deliver on wall street expectations. In return, employees have not been rewarded with commensurate raises. The fortunate employed will tell you that they haven't had a real raise in a while. Meanwhile, their responsibilities have increased due to headcount reductions. To make matters worse, interest rates are near zero so most of us are eying bank statements where cash is sitting idly losing out to inflation and by a long shot. So, as a result, we are all seeking better returns on our cash in the stock market. However, trading comes at a risk. Most retail traders are stuck trading the traditional way. They choose a company; they may do some homework then they buy its stock. Here is my problem with the strategy of strictly buying stocks: it's no better than a coin flip! Before you decide that I am crazy for suggesting presenting this notion consider this: When I buy a stock, I reach into a big bag of hopium: I hope that I picked the right stock; I hope that I picked the right time and I hope that the markets don't crash. That is a lot of hope. In reality when I buy a stock, the odds are equally split with a fifty percent chance it goes up and a fifty percent chance that it goes down. I can do weeks of research and find that a certain company is cheap when in the end, all that matters is how the markets have the same perception or not. Markets often sell ‘cheap' companies regardless of well it looks on my research write up. To further complicate matters, when I buy a stock, I put 100% of my money at risk. Yes, stocks can and do go to zero. Just think back a few years when General Motors, AIG, Goldman Sachs, Morgan Stanley, Bear-sterns, etc were all headed to zero and several actually did. Now that I have you second guessing your belief that buying stocks in good companies is not that great of an idea I want to offer you an alternative: Stock options. We've all heard that options are dangerous; you can lose all your money in options; you can make money trading options. All true statements for options and every other investment method. So, what's an investor to do? I want you to rid your mind from all mis-perceptions and misconceptions of options while I share with you one simple fact. I emphatically tell you that options can be much safer than investing in stocks. Properly structured options positions have more certainty than traditional investing in stocks. When you buy and option, this is the most money you can lose. Consider the example of wanting to go long Apple. I can spend $50,000 on one hundred shares OR buy 1 call September option contract worth for $1600. Both get me long Apple today. One way risks me $50,000 and the other only $1600. I sleep better at night knowing that only $1600 of my money is at risk. If Apple runs up then I get the proverbial ‘better bang for the buck.' Another added advantage is that options position also have a quantifiable theoretical chance of success. I can set consistent threshold levels for my trades that I can repeat over and again. Otherwise I am throwing darts and hoping for the best. My goal in this article is to urge you to start looking into options as a complementary trading method to your current strategies. An excellent way to start is to learn how options can protect your existing positions. I can even show you ways to can create your own weekly dividends. There are many resources available to help you learn more about option so you can become a more rounded trader. Just make sure you choose a reputable service. I contribute to Marketfy.com which offers a wide range of products and services for almost all investment tastes. You risk nothing with them as they offer a money back guarantee. For more of my trading ideas, you can follow me on twitter and stocktwits (@racernic). You can also reach out to me on Marketfy at: http://www.marketfy.com/store/item/create-income-with-options-spreads/preview/