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Most people stick to what they know, and in the trading world, that often means sticking to stocks.
Stock traders are usually happy buying and selling shares without venturing into the world of options. But here’s the thing: you don’t have to choose one over the other.
In fact, combining stock trading with options can actually reduce your risk and increase your potential gains.
Let’s face it — trading stocks on their own can limit your flexibility. Sure, you buy low and sell high, but what happens when the market moves against you? This is where options come in. They can be a powerful tool to hedge against potential losses or boost your returns without dramatically increasing your risk.
But before we get into how options can work hand-in-hand with stocks, let’s clear up some misconceptions.
Why Stock Traders Avoid Options (And Why They Shouldn’t)
It’s pretty rare to find a stock trader who actively trades options. Why? Because many stock traders see options as risky or too complicated. On the flip side, option traders tend to avoid stocks because they don’t want to risk owning shares outright. Both camps are missing out.
The truth is, you don’t need to choose one over the other. Using options along with stocks opens up a world of possibilities that stock traders alone might miss out on.
Whether it’s using options to hedge your stock positions or using them to add an extra layer of profit to a stock that’s already moving in your favor, options can enhance your strategy.
Why Stock Traders Should Use Options to Reduce Risk
One of the biggest benefits of options is the ability to reduce risk while still holding stock positions. Here are two simple ways of doing that:
| | • | | Covered Calls: Own stock and sell a call option against it. This allows you to collect premium (cash in your pocket) even if the stock doesn’t move.
| | | • | | Protective Puts: Own stock but buy a put option to protect yourself from downside risk. If the stock drops, the put increases in value, reducing your loss. |
Both of these strategies use options to limit downside risk while still letting you hold on to your stock positions. In other words, you’re using options to protect your portfolio while keeping the potential for upside gains.
Once you understand that options aren’t necessarily “risky lottery tickets”, you’ll see why options aren’t something to avoid — they’re a tool you can use to your advantage.
— Geof Smith
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