Investing in Options or Stock: Which One is Right for You?

For decades, Wall Street was treated like an exclusive club in the United States.

It was a high-stakes game for the super rich and a specific class of people who thrived on big risks and ostentatious behavior. Options and stock were tools used by a sect of society treated as an occasional oddity in movies and TV, equally derided and admired.

Then, over the course of one winter, a small group of online investors upended the traditional means of doing business on Wall Street, milking millions from hedge funds and introducing a generation of people to a new way of generating income: options.

The proceeding media coverage saw options thrust into the spotlight. No longer were options stocks’ strange nebulous cousin. Here was a group of people taking on the system by harnessing a previously opaque means of making extra money and using it against supposed pros. 

These new investors were so enthusiastic that an April 2021 report from Bank of America revealed that people invested $576 billion in equities during the preceding five months.To put that in perspective, investors had only put $452 billion into the stock market during the 12 years previous to that five-month period. 

Investors, inspired by reddit users sharing screenshots of their growing brokerage accounts, approached options investing recklessly. In the wake of these self-described Wall Street revolutionaries, the damage was done, and a new generation of investors put their money into options. The ones who did so without a risk-management investment strategy, lost the shirts on their backs and much more. However, millions of people around the world discovered the potential of options over stock.

If you’re one of those intrigued potential investors, you’re headed in the right direction. There is immense power in options investments, and Record Options Investing (ROI) is here to help explain why retail investors should consider making options a part of their overall investment strategy.

In Case You Missed the GameStop Debacle

Though most of the attention to reddit and it’s now-notorious options and stock trading subreddit r/WallStreetBets came early in 2021 at the height of the COVID-19 pandemic, the GameStop snowball began in September of 2019, when a user identifying as u/DeepF***ingValue (real name Keith Gill) posted a screenshot of his investment account.

For those unfamiliar with social media, r/WallStreetBets is a forum (called a subreddit) hosted on the popular social media sharing site, reddit. In this subreddit, users brag about putting thousands of dollars down on potentially disastrous options and stock investments. Before the GameStop debacle, this subreddit was simply a digital playground reserved for investors who enjoyed patting themselves on the back for making foolishly risky investments. Then Gill raised the stakes significantly in one grand gesture.

This previously unknown user invested thousands of dollars in stocks and options for failing video game retailer GameStop. The big news among users of the subreddit was the purchase of a mess of options in the company. The greater r/WallStreetBets community jeered at the naïveté of Gill’s choice. The guy bought 1,000 options contracts at a premium of 53 cents.

Specifically, he bought 1,000 contracts set for an 8 Call Strike and an expiration of January 15, 2021. Did that all sound like gibberish to you? It’s okay. Here’s what you need to know: the investor’s gamble was that GameStop stock would find itself valued at more than $8 when the options contract expires on January 15, 2021. At the time of his purchase, GameStop stock was valued around $4 a share. In other words, Gill was gambling that GameStop stock would more than double in value over the next year. 

Over the course of the next 16 months he continued to add to his position, until he accrued a total of 5,000 more options and some stock. After the resulting dust up surrounding GameStop, Gill had snowballed his initial $50,000 investment in a fortune worth, at one point, more than $45 million.

Admittedly, that summary glosses over several financial terms that could prove daunting to options trading beginners. Maneuvers like a short squeeze, the strategy Gill utilized, aren’t anything to wrap your brain around if you’re new to options or stock investments. The overall point of Gill’s tale is that, by the end, he was rich, and a new trading term, options, entered the United States’ bloodstream.

Options went viral, and suddenly, millions of people were discovering that their retail investment dollar could go somewhere besides stocks. As you might recall, everyone was eager to cash in on the opportunity to invest in options. 

So, What’s an Option?

Understanding the value of a stock is pretty simple. When a company lists its assets on the stock market, individual shares are given a set worth depending on the perceived value of the company. Investors purchase a stock with the hope that it will go up. If an investor buys a share of stock for $50 one day and that same stock’s value rises to $51 the next day, then that person has made a dollar on their investment.

Options and stocks work very differently. When you deal in options, you’re engaging in a contract between buyer and seller that hinges on the potential future value of a stock. Every options contract is composed of five primary parts:

• Expiration: Every option contract has a time limit. When the expiration date arrives, the current value of the contract is assessed and either evaporates as worthless or pays out to the holder.

• Premium: The premium refers to the value of the options contract. When two parties enter into an options deal, the premium is the amount of money exchanged between them.

• Strike Price: The strike price is the supposed price of the stock at expiration. The premium that is exchanged between parties is based on the likelihood of the stock reaching the agreed-upon strike price.

• Buyer: The buyer is the party who purchases the options contract. They begin the deal by paying out the option’s premium (called a debit).

• Seller: The seller is the party that (you guessed it) sells, or writes, an options contract. They kick off the process by pocketing the premium (it’s called a credit).

If that all sounded a little overwhelming (or too much like a vocabulary lesson), fear not. These terms and their deeper intricacies are easily digestible with a little repetition and some help from Record Options Investing. Our options education course breaks down these terms without drowning you in technical language or sloppy metaphors. (We only use the good metaphors.)

Essentially, what you need to know is that whenever people enter a conventional options contract, one party hopes that a stock will exceed a certain strike price by a certain date and the other party is betting the stock will fail to meet that same goal.

Those are the basics. There is obviously far more to options investment than the standard scenario, but there are simple option strategies you can utilize to make the most of the benefits options provide when compared to old-fashioned equity investing.

Options are definitely more complicated than stocks, but they also pose several distinct opportunities for anyone hoping to add substantial growth to their investment portfolio.

1. Leverage a Small Investment

Income inequality between the wealthy and the middle class is growing at a steady rate. Since 1970, the number of adults living in middle-class homes has dropped an alarming 10 percent. In other words, the number of people who can invest substantial sums of money in the stock market is dwindling while the number of people who could use extra income from the market is on the rise.

Here’s where options enter the picture.

When you buy stock, there is a one-to-one ratio. You pay for a share of stock and that’s what you get. One share. If it goes up a dollar, you make a dollar.

When you enter into an options contract, you’ll purchase or sell 100 shares of company stock. The premium doesn’t represent the cost of the entire purchase. The premium represents the price of a single share. (Don’t worry, though, the math is easy.)

Let’s say a contract in question has a premium of 53 cents, just like the ones Gill bought in September 2019. That 53 cents represents the price of one share in the contract. Since the contract itself consists of 100 shares, the price of the contract is:

.53 x 100 = $53.00

In this scenario, Gill leveraged 100 shares of GameStop stock for just $53. If he’d wanted the same amount of shares in stock, Gill would have needed to pony up $400 at that time. With a fraction of what it would have cost to buy the stock outright, he still had the chance to make a significant profit by investing in options over stock. 

Here’s the kicker: when you invest in stocks, your win-lose ratio is dollar-for-dollar. When you choose options over stocks, you’ll see the value of your options increase much quicker because you’re leveraging a larger percentage of stock in the company.

When you stick to ROI’s easy-to-use strategies for options investors, you could potentially see up to 2 times the return on your investment (or higher) when compared to traditional stock trading.

2. Expiration Dates are a Suggestion

Another critical difference between options and stocks is the expiration date. When you purchase a stock, you own it until you decide to sell. That may be tomorrow or ten years from now. When you buy a stock option, a clock begins ticking automatically.

That expiration date is daunting to a lot of newcomers who feel compelled to stick it out until expiration day. (That pack of reddit users on r/WallStreetBets proclaiming the virtues of holding until the end doesn’t help matters, either.) The truth is that the expiration date of your options contract is just a suggestion. Provided there’s interest, you can close your position the moment you feel compelled to do so.

When you work with ROI to improve your financial literacy, we’ll demonstrate how to take this timeframe and wield it to your advantage. This inherent flexibility makes options investment the ideal selection for active traders who want to keep a close eye on their funds. It also offers investors the ability to strike when the iron is hot, whether the expiration date is approaching or not.

3. Earn Synthetic Income

Perhaps the most appealing aspect of options is the ability to generate regular synthetic dividends with your investment. Options and stocks both offer routine ways of generating extra income, but the return with options can be far greater.

When a stock is doing well, companies pay out small sums of money to shareholders known as dividends. On an extremely high-performing stock, owners can expect about 2.5 percent in annual return on their investment. Meanwhile, any income they generate as the stock rises in value isn’t technically theirs until they sell. What’s more, once they sell their position in a stock, they no longer generate any income (because they sold their stake).

By actively using one of ROI’s options strategies, it’s possible to generate ½ - 2 percent return on your investment every month. That’s a 10-12 percent annual return on your investment with a low-risk strategy that actually lowers your costs the more successful it is.

4. Active Investors Welcome

Investors who take the traditional route and buy stocks are often tempted into a passive position. That is, the longer they hold a rising stock, the more profitable they become. That leads to days and weeks without any improvement in their financial situation, because — as we just said — shareholders don’t really make any money until they sell their stake in a company.

Options aren’t so static. Their value can fluctuate. That requires a keen eye and regular interaction with your finances, but there is ample opportunity in those fluctuations. ROI’s strategies encourage and reward active investors willing to spend a little time each day monitoring their portfolio. Once you understand the strategies we teach, you can successfully manage your options portfolio in under an hour each day.

5. The Only Place to Go Is Anywhere

Flexibility is the name of the game when it comes to options more than stocks. Again, stock trading is straightforward. You buy shares; if their value increases, you win, if not, you lose. With options, you can implement a variety of different strategies based on your perception of how the market and individual options and stocks will move in the coming days and months.

Options investors can try to predict that a stock will fall if they think a company is expected to fail. Predicting the failure of a specific company and pinning large sums of money on that assertion is a method employed by hedge funds and financial institutions around the world. Options investors can also take a stance of neutrality and enter contracts that assume the stock’s value won’t change.

When you enter the world of options, you’ll discover a myriad of ways to invest your money to ensure you’re always maximizing your return on investment.

6. More Than One Way to Invest

Yet another limit to stock-buying’s flexibility is it’s inherent risk. When you buy a stock there is a 50/50 chance that you’ll make money. Sure, you can arm yourself with expert opinions and hours of independent research, but at the end of the day, when you’re working with stocks, the odds you’ll see some money back is one out of two.

It doesn’t take a financial genius to see stocks as too high risk of an investment when their future financial well-being is on the line. Fortunately, when you’re investing with options over stocks, ROI’s time-tested options investment strategies clearly define your investment risk and put you in control of how much you might lose.

Gill Did It Wrong

Gill illustrated a very dangerous lesson. On the bright side of things, the spotlight shown on his investments helped usher in a new zeal for personal investment and highlight the level of accessibility provided by options over stocks.

On the negative side, the means by which he accrued massive wealth in a relatively short timeline is a one-in-a-billion success story. While his accomplishments are undeniable, this ambitious investor’s example is not a roadmap to success. He invested all of his money in an unlikely long-shot victory that just happened to pay out. On any other day, his GameStop investment would have been as wise as shelling out $50,000 in lottery tickets.

Options can be an undeniably powerful tool in any investment portfolio. They can even serve as a primary source of income once you learn the ins and outs. ROI’s investment guide and tools demystify the world of Wall Street while limiting your risk and guiding you toward time-tested strategies that have proven effective.

There is a world of possibility in options trading. Let ROI help you unlock the door. https://www.recordoptionsinvesting.com/learn-options-trading for Record Options Investing's 14-Day Option Investor course.