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This Web site contains a compilation of more than a thousand consumer finance  columns written by Tony Novak from the 1980s through 2006, updated and reformatted for maximum usefulness today.  New material was added after 2010.

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Stock options vs. stocks

originally posted: 11/22/2006  reposted: 2/18/2011 This post has not been recently reviewed or revised by the author and may be out of date. If in doubt, please send a new question or ask for an update.

Q: I am thinking about buying stock options instead of stocks in order to increase returns. Is this smart?

A: This is not a topic that can really be summed up in a simple format like this. However, your thinking is not alone. The trading of stock options by retail customers has increased sharply in recent years. Three key points seem worth considering at this stage. First, trading options clearly takes more technical knowledge and concentration than investing in common stocks. Secondly, options will exaggerate the effect of any market movement. For example, if the market goes up, profits on options could be larger than profits on stocks. But the reverse is also true; if the market goes south then losses on options will be greater than losses on stocks. Remember that stock buyers seldom lose all of their money but buyers of stock options often lose the entire amount invested in a singular trade. Third, it is often more difficult for a small retail investor to get favorable executions of options than stocks. In general, I am thrilled with the price and quality of today’s retail stock executions but I often feel “ripped-off” by options less than stellar executions. A loss of even 1/8 of a point on each option trade due to poor execution plays a significant role in the overall rate of portfolio return over the long term.


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