Stocks vs. Options Explained

stock Traders and investors who are unfamiliar with the world of options are leaving money-making and money-saving opportunities on the table in this video I will break down the main differences between stocks and options specifically what you own how much time you have how easy it is to lose money the ways you can make money how much money you can make and taxes by the end of this video you will clearly understand why some people prefer stocks Some people prefer options and why some people will utilize both let's start with what you own when you buy

shares of stock you are becoming part owner of a company such as Nvidia So when you buy shares of Nvidia you become a very small owner of nvidia's company if Nvidia performs well over time and the share price grows then you will make money from your investment but if Nvidia does poorly over time and they do not grow the business then the shares of stock that you own will decline in value and you will lose money on your investment when you buy stock in a company you also get voting rights with each share that you

own so the more shares that you own the more voting power you have at corporate elections and annual meetings and therefore very large shareholders in publicly traded companies can play an active role in the future plans for that company so as an option buyer you are not actually investing in the shares of the company and you're not becoming a part owner of the company you are simply buying and trading a financial contract that will change value depending on on what the stock price does between now and some point in the future option holders also don't

get any voting rights like shareholders do because as an option holder you are not actually holding the shares and so you don't have any voting rights when you are holding options one of the big differences between stocks and options is how much time you have one of the huge benefits of buying shares of a stock is that you have no time limit so if you think a company will perform well over a long period of time you can simply invest in that company's shares and you can hold those shares for as long as they are

public and in most cases that means you will be able to hold that company's shares as an investment Forever on the other hand when trading options you do have a time limit because all options have expiration dates so the option holder can buy or sell shares of stock at a fixed price on or before that option's expiration date so the fact that all option contracts have expiration dates naturally gives every option position a specific time limit most most options Traders will open positions with a few weeks or a few months until expiration but some Traders

may be more short-term focused and might trade options over the course of a few days or even as little as a few hours longer term focused Traders can use options with multiple years until expiration the next big difference between stocks and options is how easy it is to lose 100% of your money when you are buying stocks the only way to lose 100% of your money is if the stock price goes to zero that that is of course if you have an unleveraged position so if you have $10,000 in an account and you put $10,000

into Apple stock the only way you can lose all $10,000 is if Apple goes to zero which means the company has failed when you're trading options on the other hand the stock price doesn't need to go to zero for an option position to lose 100% of its value an option position can lose 100% of its value as long as the stock price is above or below a specific price at the time of that option position expir in for example an apple options Trader who buys a 38-day call with a strike price of $140 will lose

100% of their trade allocation if apple is at or below $140 in 38 days with apple around $139 as of recording this video that means that Apple doesn't have to move at all for this call Trader to lose 100% of the money that they put into this trade and as mentioned the only way a non-leveraged Apple stock investor could lose 100% of their money is to see the share price go to zero which means Apple the company has failed so it is more likely to see an option position go to zero as compared to seeing

a stock price go to zero because it's less likely for a company to go out of business than for a stock to be above or below a specific price at some point in time the next big difference between stocks and options is the number of ways that you can make money with both investing in stocks is very straightforward because if if you buy shares of stock the only ways you can make money are the stock price going up or if the company pays a dividend if you are shorting stocks which means you are betting against

the success of that company the only way you can make money is if the stock price Falls with options it is much more complex because you can buy or short options and make money if the stock price goes up or down from those positions for example you can buy calls or short puts and both of those trades will make money if the stock stock price increases you can also trade market neutral option strategies that profit as long as the stock price stays within a specific range or doesn't move much you can even make money with

options if the stock market's expectations for a specific stocks volatility increases or decreases which is called volatility trading so options give you the ultimate flexibility in regards to how you can make money and what your specific stock predictions are over a specified period of time however it should be mentioned that option holders do not receive dividends as stockholders do the next big difference between stocks and options is how much money you can make when buying stocks you theoretically have unlimited profit potential because there is theoretically no upside limit to how high a Stock's price can

go if you're shorting stocks which means you are betting against that share price from increasing the most money you can make is the share entry price or your short entry price so if you short a stock for for $77 per share the most you can make is $77 per share because if it goes from 77 to zero you will have a $77 profit per share on your short position when buying options specifically call options you also have theoretically unlimited upside profit potential because call options increase as the stock price increases and since there is no

limit to how much a Stock's price can increase there is no limit to how much a call options value can be when you're shorting options the most money you can make is the difference between your short entry price and zero just like shorting stocks because for example if you short an option for $300 and the option price expires worthless and goes to zero then you will make $300 from that short option position the big difference between stocks and options in terms of the amount of money you can make is that option contracts will experience larger

percentage changes than the stocks price itself so for example Apple shares have fallen about 21% from the high in August of 2022 to the time of this recording but a 175 strike Apple put option expiring in January of 2023 increased by 230% during that same stock price movement so while the price of Apple shares declined by 21% this specific Apple put option increased by 230% over that same stock price movement which of course is a way larger price change compared to that 21% decline in Apple's shares and this is precisely why people trade options instead

of stocks at times especially when they have a high conviction of a specific stock price change over a specified period of time the last big difference between stocks and options that we will discuss is in regards to taxes both stocks and options are taxed based on how long you held the position specifically if you held a position for less than a year and you sold it for a profit then you will pay short-term capital gains taxes or you will be taxed at your ordinary income tax rate if you sell something for a profit that you

held for longer than one year you will be taxed at long-term capital gains taxes which will be 15 to 20% depending on how much your income is per year high earners are therefore incentivized to hold their Investments for longer than one year because that 15 to 20% long-term capital gains tax rate is much lower than their ordinary income tax rate since options Traders rarely hold option positions for longer than one year options Traders should expect to pay short-term capital gains tax rates on any profits that they make if a Trader is trading options on futures

or an equity index product like SPX then any profits will receive 60/40 tax treatment 60/40 tax treatment means that 60% of the profits will be taxed at the Traders long-term capital gains tax rate and 40% of the profits will be taxed at the the Traders short-term capital gains tax rate or their ordinary income tax rate so in terms of taxes a long-term stock investor will generally pay lower taxes than an options Trader simply because an options Trader will rarely hold option positions for longer than one year