All right, so stocks versus options,
what should you trade?
What is better? Is it better to
trade stocks or is it better to
trade options?
That's what we're going to talk
about today and I will show you
practical examples from
trades that occurred today.
So let me jump onto the
desktop, and I prepared a
little notepad here for you where we
talk about trading stocks and
options. Now, I want to use
an account size of
$20,000 as an example here where
I'm comparing whether it is better
on an account size like $10,000 or
$20,000 to trade stocks
versus options.
Now, depending on your account size
just multiply the numbers
that I'm showing you in a moment by
whatever your account size is and
you'll get the idea.
So the idea is on an account
of $20,000 we want
to risk 2% of the account,
which is $400,
not more.
Now, as we are comparing stocks and
options, here are the things
that I want to compare.
First of all, I want to write down
how much we are risking trading
options versus trading stocks.
I also want to write down the
reward, how much are we planning
to make on the stock
or the option.
Based on this, I want to write down
the risk/reward ratio,
and also very, very important,
the buying power.
Now, what is the buying power?
The buying power is the amount
of your account that you need to
reserve for this trade.
It is not the risk and you'll see
this in just a moment.
So let's take a look at
some very specific trades
that happened here this morning.
So the first trade that I want
to bring up is INSW.
So let me just show you what
happened.
So this morning on the PowerX
Optimizer, INSW
came up as a trade, as
a buy to open.
And the idea here is that we are
buying
239 shares based on a $20,000
account at
$22.84.
So this is where our risk,
as you can see, our stop loss here
is $1.67
and we are trading 239
shares. Here I want to keep it
a little bit easier for all
of us with the math so
we're trading 240 shares.
What is our risk?
This is where we bring out our handy
dandy calculator here.
Per one share, we are
risking $1.67 and
we are trading 240 shares,
meaning that our risk is exactly
$400.80.
So here let's just round it
to $401.
Now, what is the potential
reward that we are looking for?
So here we are looking for a reward
of $8.62
per share.
Now again, bringing up our handy
dandy calculator,
$8.62 times 240
shares, so we're looking to make
$2,069. So we're putting this
into our table,
$2,069.
So the risk/reward ratio
here, PowerX Optimizer is
calculating it, it's 1:5.16
so let's just say 1:5.2.
And here is the buying power
that we need out of our account.
Again, we are buying 240 shares
and the cost per one share
is
$22.84.
So we need
$5,482 in buying power.
So this is how much
our buying power will be reduced
when we enter the trade.
Now, let me ask you, is this making
sense thus far? Just so that you
know what happens when you're
trading the stock.
And again, we are trying to risk
around 2% of the account
here $401.
Now, let's take a look at
the option here.
So I prefer to trade the
ITM, we'll make another video
on the difference between ITM and
ATM.
But here we are talking about the
$22.50 call and
you see that the risk is a
$172 per one
option.
So if we want to risk overall
$400, we're dividing
this by 172 means
that we can actually trade 2
options.
So INSW, the option,
we can trade 2 of them.
Again per one
option, the risk that PowerX
Optimizer is calculating for us
it's $172
times 2, so we would risk
$344 trading the option.
So we are risking
a little bit less and this is just
based on the price of
the option.
Now in terms of the reward, we
are looking to make
$6.80, it's
$680 per one option
and we are trading 2 options,
meaning that if
this trade works out, we are making
at least
$1,360. Now, as you can see, we
are making a little bit less.
So let's take a look at the
risk/reward, which PowerX
Optimizer is calculating for us.
So the risk/reward is slightly
lower, it's 1:3.95.
Now we're rounding it up so it's
1:4.0. So as you can see, the
risk/reward ratio when trading
the option is slightly worse
but here's the deal.
What is the buying power that we
need for this?
The buying power that the broker
will deduct from overall buying
power in the account is
our entry price.
So here we are trying to enter at
$2.16, we can
round it up to $2.20,
and since we are trading 2 options
this means that our buying power
is $440.
Can you already see what the
difference is between trading stocks
and trading options?
Your buying power is less
than 10%.
Now, keep in mind, the buying
power is not what
you're risking.
The buying power is just how
much of your
$20,000, yeah?
Is being held in reserve
for this particular trade.
So you can't use this money anymore.
So if you trade the stock, you would
still have around
$14,500 left.
However, if you're trading the
option, you still have
$19,500 left.
Is this making sense thus far?
And would you like to see another
example?
I want to make sure that this video
is not getting too long, but I
thought it would be helpful to show
you one more example of
another stock versus the option.
So the other trade that I want
to show you is TVTY.
And here we wanted to trade
392
shares so let's just
round it up to 400,
okay? So here we would trade
400 shares,
you get the idea.
Now let's take a look at the risk
first.
So the risk to bring up the
calculator here is
$1.02 per one share.
So we're taking $1.02
times 400 shares
means that we would risk
$408, which is still within our
parameters.
You know, we were planning to risk
around $400 so here it
would be a little bit more,
it would be $408.
Now, if this trade works out,
here is what the reward would
be. So the reward is
$5.61, that's how much we are trying
to make on this trade.
And we take the
$5.62 times
400 shares, so we are trying
to make
$2,248. So the risk/reward,
if we look at this, is
1:5.5.
Now, here is the buying power
that we need.
TVTY is trading at
$11.30, so this is where again,
$11.30 times 400
shares so we need $
4,520 in buying power.
Again, not a big deal if you're
trading a $20,000 account
it will be reduced and you have
less money to trade right now,
around $15,500.
Very, very, very important, this is
not the risk.
This here is the buying
power that is needed.
Our risk is
$408.
Now, let's take a look at the
options tab.
Our risk here, per one
option is $141.
So if we want to risk overall $400,
we're dividing it by
$141, it's
2.83. Now, in order to
make it all a bit easier to compare
apples with apples here, I
am actually saying that we
would trade 3 options
and $141
is what we are risking per one
option, so $141 times
3. It's a little bit more than our
$400, but I think we are
still OK here.
So we would risk $423.
Now the potential reward
per one option
is $444.
So this is where we take $444
times 3, and again,
this is where we are looking at
$1,333.
Again, as you can see, the
risk/reward ratio here
is worse than if we would trade
the stock. It is 1:3.15
so we are rounding it again to
1:3.2.
So, again, it would be better to
trade the stock, but you're
using quite a lot of your buying
power.
For the option all you need,
all that is reduced is your entry
price, and the entry price it's
$2.47,
so let's say $2.50
times 3 is
$750. Is this making sense?
So you see, you need less
buying power, but also
you have a smaller reward.
But this is why I say usually on
a smaller account, it makes
sense to trade options instead
of stocks.
Now, the other important thing that
I will write down here in a moment,
especially when you trade a
retirement account,
you don't get a margin account
there, so you cannot leverage
the money that you have in the
account and you cannot
short stocks.
So let's write this down because I
do believe that this is
important.
So in the US, at least
in a retirement account,
you can not short
stocks.
However, what you can do in
a retirement account, you can
trade put options,
and with put options you can bet
on a falling market.
So this brings me back to the
question, what is better trading
stocks or trading options?
Well, this is why I wanted to show
you a direct comparison
using a real-life example
so that you see exactly
when it is more advantageous to
trade stocks, when it is more
advantageous to trade options.
Long story short, often for smaller
accounts, since you use
less buying power it makes
more sense to trade options,
but now you know exactly, you have
to direct comparison between
stocks and options.
So that hopefully it helps
you that you can decide what
is better for you. Anyhow, if you're
enjoying this, make sure that you
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Also, there's a few other videos,
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you in the next video.