To begin this article, I would like to start out by saying that all the advice I give is strictly from my own experience. There are a billion and one different strategies for making money in the market and this strategy is simply the one that has worked for me. NOW- In this article specifically, I am going to explain 3 reasons why you should trade options instead of stocks if you are aiming on making consistent income.
Reason 1: You Can Make Money When the Stock Price goes Up, Down and Sideways
Simply put, when buying a stock, you make money when the stock price goes up. For the average investor, this is the only way you can make money in the stock market. (For learning purposes)-Sophisticated investors with a bunch of money in their brokerage accounts can make trades that will make money when the stock price goes down by shorting stock, but this is very risky as your potential loss can literally be infinity.
If you are reading this, you are likely not a sophisticated investor and can only make money in the stock market if the stocks you buy increase in price.
What the heck are you going to do when the market crashes? How will you make money with stocks? I have no freaking idea.
Now- for why you should trade options. As the header highlights, you can make money trading options when the stock price goes up, when the stock price goes down, or when the stock price stays the same.
Reason 2: You Make A lot More Money, and You Make A lot More Money Faster
I am going to explain this reason through an example:
If you invest $100 in one share of stock and it goes up 10%- you make $10. For a stock to go up 10% is an absolute mission, and if you were to make 10% on a stock this would likely take some time. On top of this, you only make $10? This just does not seem worth it.
My way of trading options is one which only focuses on selling, never buying, so for the sake of this example I will be demonstrating how you make money by selling an option.
If you were to sell an option for $100, and the stock price just stays at $100, OR goes above $100 by any amount for a certain amount of time, you would make $100. Not only do you have the potential to make a lot more money, but you also have significant potential to make this money a lot faster. On average, I realize my profits with options in one to two weeks.
Disclaimer- options are a bit more complicated than this, and there are many different ways of selling options, but I wanted to illustrate the difference in profit potentials between stocks and options without throwing a bunch of complicated finance terms around. Further, in my way of trading- profitable options are always closed anywhere between a 20-50% profit, never %100 (later articles will explain why).
Main Point: To make significant money in trading stocks you have to bet on the stock price to skyrocket (very unlikely), whereas with options you just need the price to stay within a certain range (much more likely).
Now, I am sure you are realizing that if you can make a lot more money trading options you can also lose a lot more money trading options, and you would be right! BUT, this brings me to my final point.
Last Reason: You Can Manage Your Positions if You Are Losing
This last reason may be a little complicated to understand if you have not yet traded options, but I am here to try my best.
In trading stocks, if the stock price goes down all you can do to make your money back is wait for the stock price to go back up. This could take a couple days, a couple months, or maybe even longer. This is awesome for longterm investors, but with those of us who are trying to make money fast, we simply do not have the time.
I am not going to sit here and say that you do not lose money with options, because you do and you will. BUT, there are many ways to significantly reduce your losses when you have made a bad trade, and this blog is going to teach you how to do just that.
Summary
In all, stocks are a great long-term investment, and a handful of people have been able to make an income through day-trading, and I am not knocking it by any means. However, the reasons above, are what gave me incentive into trading options as opposed to stocks.