Understanding the Unlimited Upside of Stock Options
The following is adapted from The Tao of Trading, by Simon Ree.
Have you ever contemplated buying a Malibu beach house? How about a French Chateau in the Loire Valley?
It’s a pipe dream for most of us, isn’t it?
But how about renting one for a week? Suddenly, the idea sounds much more plausible.
Like renting an apartment for a week, trading stock options allows you to “rent” the stock of your choice for a set period of time, without the significant cost associated with a purchase. In other words, options are like the Airbnb of the finance industry — you get to use luxury property without paying the full price to own it.
As you can imagine, there are huge financial benefits to accessing top-tier stocks without the equivalent price tag. Let’s explore the practically unlimited upside of stock options and how they can grow your wealth much faster than traditional “buy and hold” methods of investing.
The Benefits of Options Trading Over Buying And Holding
There are several reasons trading options is a more flexible and lucrative strategy for investors over buying and holding stocks. Let’s frame them using my French Chateau example.
For a start, “renting” (trading options) is advantageous over buying because maybe you can actually afford to rent one for a week. Plus, you’re not tying yourself down or overcommitting. Besides, you didn’t want to live in the Loire Valley long-term anyway…and pay for all the repairs and maintenance on some creaky old castle.
Options are similar. Instead of forking out $130,000 to buy 100 shares in Google (or Alphabet, as they’re called now), you can pay a fraction of that amount to “rent” Google stock for a set period of time.
Under the conventional “buy and hold” method of investing, you own a portfolio of stocks, ETFs, mutual funds, and bonds regardless of what the markets are doing. This means you are constantly exposed to market risk. Trump tweets, trade wars, recessions, bear markets, credit crises…yep, you are there for — and exposed to — all of that fun stuff.
As options traders, we are far more selective than “buy and hold” investors about our risk exposure. We choose to have exposure to risk only for brief periods of time, as opposed to all the time. Furthermore, options trades can be set up for an account of practically any size. Even if you’re trading options in high-dollar value stocks like GOOGL or AMZN, an options trade can be set up that only costs a few hundred dollars.
Price Up or Price Down — You Can Still Make Money
The other fantastic feature of options is they enable you to make money whether stocks are rising or falling in price.
It’s true that stock markets tend to go up most of the time. But when they do enter a bear market, the falls can be dramatic. We saw this happen both to the NADSAQ from 2000 to 2002 and to the S&P 500 from 2007 through 2009.
Bear markets like these can have a devastating effect on both the wealth and the psychology of traditional “buy-and-holders” who are praying for the market to go up every day. As option traders, we lose this one-eyed view of the markets — always hoping that markets go up. Because we can make money whether stocks are rising or falling, it is much easier for us to remain emotionally detached from market action.
This emotional detachment from and curiosity about markets leaves us in a powerful place psychologically to make money from the markets. We are relying on the skills and knowledge we have developed as traders instead of the hope and blind faith “buy and hold” traders often succumb to.
Options Rapidly Grow Your Wealth
To recap, options are like renting stock — you don’t need to pay full price and purchase the stock to access it and earn money in the short-term. Because you “rent” stocks for only a short amount of time, your risk is similarly limited. If the market crashes, your entire portfolio doesn’t go down the drain like it might with a buy-and-hold strategy.
It is these two factors — the limited amount of money needed to trade options and the limited risk — that make options a fantastic instrument for quickly growing your wealth. You can buy in without a huge initial investment, and you can rapidly grow that money through multiple, quick-succession options trades.
Contributing to the acceleration of the growth of your wealth, you can make money whether the stock market is rising or falling, so you’re not crossing your fingers and hoping that markets only go up. All of these factors combine to swiftly grow your wealth, granting you the benefits of staying in the Loire Chateau with none of the property tax, upkeep, or disaster risk that comes with buying.
For more advice on growing your wealth through trading, you can find The Tao of Trading on Amazon.
Simon Ree has twenty-eight years of experience as an active trader, investor, and financial markets professional. He previously held senior positions with Goldman Sachs in Sydney and Citibank in Singapore before deciding to focus on options trading full-time in 2017. He has spent over 40,000 hours watching and analyzing markets, and during this time, he “cracked the code” on how to trade safely and profitably. Today, he’s passionate about teaching others what he’s discovered. In addition to trading, Simon is a certified Jeet Kune Do instructor and a Reiki master. He lives in Singapore.
