The Advantages Of Trading Options Over Stocks
By Billy Williams
Copyright 2006 Billy Williams

In the investing world, trillions of dollars worth of shares are bought and sold each day on the major exchanges all over the world. On any given day, traders and investors can take part in the purest form of capitalism by putting their money at risk by buying into any of the major global corporations across the planet in the pursuit of profit. Yet, there is another way of speculating, trading options, which can be far superior to just trading the shares of a given company.


An option is a derivative on an underlying security that gives the right, but not necessarily the obligation, to buy the underlying security at a given set price. They come with different strike prices, expiration dates, and allow tremendous leverage as each option controls up to 100 shares of stock in a particular company. These advantages make options a far superior trading instrument than just trading stocks.

One advantage is leverage. Leverage is the ability to use a small amount of capital to control a huge asset. Like in real estate, where a small down payment allows a prospective buyer to control a huge piece of property, options allow the trader to control up to 100 shares of stock for with just a tiny bit of capital or, in this case, it is called the option’s “premium” which is the actual cost of the option.

Let’s look at an example of how options are superior to in when using leverage. If you notice that ABC stock is set to rally higher and is trading at $50 a share and you then buy 100 shares of stock for a total of $5,000. A few weeks later, ABC stock has rallied to $60 a share and you sell all your shares you will have profited $1000 or a 20% return. Not too bad.

But a friend of yours sees the same setup in ABC stock and decides instead to buy an option with a $50 strike price which is priced a $2 premium for a total cost of $200 ($2 X 100 shares = $200). ABC stock rallies to $60 and your friend sells his $50 strike option for $1200 which is a 500% return! That’s the power of leverage when trading options.

Another advantage is that a trader can generate income by using credit spreads with options. If you see that ABC stock is in a trading range and is staying above support at say around $50 a share you can create a credit spread by creating what is called a Bull Put Spread. You sell the current month’s $50 put option and pocket the premium you received and then purchase the current month’s $45 put option for insurance in case the stock plummets unexpectedly. Then sit back and let the options reach their expiration date and you collect the difference between the premium received for selling the $50 put option and the cost of purchasing the $45 put option.

ABC stock can go up

Time to Stop Writing About Stocks and Start Buying Them
After years of writing about Washington investing, I'm getting ready to buy my first stock in a local company.
Old Money Takes Its Time At Chevy Chase Land Co.
From Ed Asher's penthouse office on upper Connecticut Avenue, the canopy of leaves that covers Washington's suburbs rolls off in all directions like a verdant sea.
We're Stuck With The Mortgage Monsters
After too many years tilting at Washington's windmills, there are few subjects left that can trigger my feelings of outrage.
Rukeyser Pioneered TV Stock Talk, and Cramer Added the Laugh Track
Watching Jim Cramer on CNBC, ripping the head off a toy bear, then raking his audience with machine-gun sound effects, left me longing for the days when Louis Rukeyser was considered "too showbiz" to be talking about stocks on television.

Companies Ignored by Institutions Can Prove Strong Performers
In Washington Investing 101 -- and most books on personal finance -- the first chapter is "The Magic of Compounding," a discourse on how your money can grow if you let gains build year after year.
REITs No Longer Resistant to Rate Increases
Fifteen times in a row the Federal Reserve cranked up interest rates and real estate investors stood their ground.
Va. Takes Heed of Md.'s Electric Rate Backlash
While Maryland politicians and Constellation Energy Group Inc. executives muck around in the mess they've made of electric rates, Wall Street is looking across the Potomac and worrying that something similar could happen in the Old Dominion.
Local Telecom Stocks Reconnect With Investors
Looking at the list of Washington's best-performing stocks for the first quarter, you'd think it was 1999 all over again.

For Start-Up Insurer, Flirting With Disaster Ended Badly
To the list of those hit hard financially by last year's Gulf Coast hurricanes, add some new names:
Infrastructure: A Road to Riches?
If somebody asked if you wanted to buy the Brooklyn Bridge, you'd know it was a con. But how about buying the Indiana Toll Road?
Radio One Takes a Long View
Back when Radio One Inc. began buying radio stations, hip-hop was unheard music.
Stock Markets on the Open Market: Exchanges Go Public, Generate Windfalls
If you think the stocks on the Nasdaq Stock Market have been doing well, take a look at the stock of the Nasdaq Stock Market.

French Parent Targets Huge but Little-Known Lafarge North America
The Washington area is preparing to bid a raucous au revoir to one of its biggest but least-known corporations -- one that arguably never should have existed.
A Lonely Voice Is Vindicated as Google Falters
When Google stock plummeted Wednesday, investors in Maryland's most-vaunted mutual fund, the Legg Mason Value Trust, lost $130 million in value in a single day.
Danaher Thrives on Discipline
For the chief executive of an $8 billion-a-year business that grows by making acquisitions, Danaher Corp. President H. Lawrence Culp Jr. has an impressive ability to say no.
Six Flags Gains Ground Under Redskins' Snyder
Okay, so Redskins owner Daniel M. Snyder can't get his football team into the Super Bowl, but the guy sure knows how to make money on his new sideline -- the Six Flags amusement park chain.

Cuisine Solutions Sizzled in 2005
Washington investors had to read the food section and restaurant reviews to find last year's top-performing local stock -- Cuisine Solutions Inc., an Alexandria company that makes gourmet frozen food.
Dealmaking Power Companies Change the Utility Landscape
Consumers and investors may think it doesn't matter much that Constellation Energy Group Inc., Maryland's biggest utility company, plans to merge with Florida's FPL Group Inc. Think again.
BlackBerry Users Can Relax: NTP Won't Shut You Down
This column is for all those traumatized people who type with their thumbs.
A Peek Inside a Private Offering
Joe E. Robert Jr., the Washington area real estate mogul and philanthropist, has lots of friends.

Investors Could Find A Chink in Under Armour
Not since Cal Ripken Jr. has Maryland produced as rich a sports hero as Kevin Plank.
Host Marriott, Out of the Shadow
What do you call a company that's the biggest in its business, valued by Wall Street at more than $16 billion?
Carl Icahn's Latest Shuffle
Carl Icahn has been trying lately to tell General Motors Corp. and Time Warner Inc. how to run their businesses. The 68-year-old New York financier has acquired significant stakes in both companies and is hectoring management to do something to "increase shareholder value" -- in other words, make the stock he just bought worth more.
Signs Abound That the Joy Ride Of REITs May Be Ending
If you want to understand how nervous real estate investors are these days, take a look at Mills Corp., the company that owns Potomac Mills, Arundel Mills and dozens of other mega-malls.

AES Continues to Charm Wall Street Analysts
Every week the Bloomberg news service compiles a list of companies that get the best rankings from Wall Street analysts. And every week for months, AES Corp. of Arlington has been on that list, ranking among the 30 most highly recommended stocks in the Standard & Poor's 500-stock index.
Nextel Partners Is a Phone Company Without a Brand
Marrying into a family can always bring problems, but rarely do family feuds turn nasty as fast as the dust-up between Sprint Nextel Corp. and Nextel's most successful offspring.
A Chill Hits Feverish Biotech Stocks
Every fall, the biotechnology industry used to get a predictable lift from an annual conference on infectious diseases where biotech companies report their latest drug research. A hint of success in the lab or in patient testing for one or two new drugs would elevate the whole risky sector.
WorldSpace Stumbles
Judging from what happened before WorldSpace Inc. went public in August, the Silver Spring-based satellite radio service should have pulled off Washington's hottest initial public offering since the Roaring '90s.

Blue-Chip Trio Played Out of Tune in Third Quarter
Fannie Mae, Freddie Mac, Marriott International.
Hurricanes Bring Price Spikes in Stocks, Construction Supplies
Driven by Katrina and now Rita, higher prices are rolling through the building and construction business, affecting both consumers and investors.
Airlines Hide Out In Bankruptcy Court
US Airways of Arlington is on Runway 11, revving its engines to fly out of bankruptcy.
Lockheed Rules Roost on Electronic Surveillance
Small-time stock traders love to try to make money off news events, so when the London transit bombers were caught on video cameras recently, electronic surveillance stocks got hot.

Quirky MicroStrategy Springs Another Surprise
MicroStrategy Inc. has produced such solid profits and strong stock performance recently that it was almost possible to believe the company had put its past behind it and matured into what it was always meant to be -- a nice second-tier software maker.
Sprint Nextel Emerges as Contender to Rule Local Market
Move over, Lockheed Martin.
All Is Not Equal in the World of Spinoffs
When Marriott International Inc. spun off a new real estate investment company to buy hotels, so many investors wanted in on the deal that the year-old company, DiamondRock Hospitality Co., sold $292 million worth of stock in May instead of the $172 million it had first offered.
Asbestos Stocks Hostage to Fate Of Legislation On Liability
Six months ago, W.R. Grace & Co. was the hottest stock in town.

Aether Systems Finds a Billion Dollars in Losses Is an Asset Worth Protecting
When David S. Oros, the founder of Aether Systems, came by for lunch with editors and reporters six years ago, he was one of the rock stars of Washington business.
SEC Trading Rule Gives Executives An Out Just Ahead of Bad News
In the month before the Trex Co. revealed that slumping sales and rising raw materials costs are eroding profits, three top officials of the Virginia maker of composite deck boards cashed in a combined $2.75 million of their stock.
Down but Not Out, Local Stocks Fare Better Than the Dow
How much money have you lost in the market so far this year?
Share Prices Fall, But Pay Goes Up
Pay for performance. What a great idea. Too bad the executive compensation system so rarely works that way.

Financial Firms Weigh Expansion Closer to Home or Farther Afield
The future of three of the Washington area's biggest financial services companies depends on a question nobody can answer with confidence.
Winning and Losing, Yet Still Coming Up Big
On most rankings of mutual fund performance, two fund families based in the Washington area show up among the biggest winners -- and the biggest losers.
US Airways Investors Live in A Fantasy World
Attention investors: The captain has turned on the seat-belt light. Please prepare for landing.
Delisting A Stock Isn't A Death Knell
Champagne corks pop to celebrate initial public offerings, when companies sell stock to the public for the first time, but there are no ceremonies to mark the other end of the corporate life cycle, when a company's stock is delisted.

Online Investing: Consolidate Or Go Home
As chief executive of E-Trade Financial Corp., Mitchell H. Caplan is determined to be a winner in the multibillion-dollar game of musical chairs in the online investing business.
Riggs Stockholders Decide How to Collect in PNC Deal
Riggs Bank's customers and shareholders are facing a tough decision: Should they stay, or should they go?
Xybernaut Stock Sold Like Its Computers Didn't
As a maker of "wearable computers," Xybernaut Corp. of Fairfax has been far more successful at selling stock than selling computers.
To Find Top Performers, Get Back to Basics
As chief executive of NVR Inc., the Washington area's biggest home builder, Dwight C. Schar gets a lot of grief.

Legg Mason's Miller Presses For Qwest Bid
Other investors may own more MCI stock, but few have as much at stake in the fight for control of MCI Inc. as Baltimore's Legg Mason Inc.
As Coal Prices Rise, So Do Coal Stocks
You can't help but be reminded of the Little Engine That Could when you chart the stock price of Massey Energy Co. of Richmond.
USEC's Gain Tops Regional Stock Index In 1st Quarter
In the gloomiest quarter in two years for Washington investors, one stock glowed like it was radioactive.
Plan to Merge MCI, Qwest Has A Sour Ring to It
As a long-time advocate for investors, it pains me to say it, but MCI Inc.'s board of directors ought to tell shareholders who oppose merging with Verizon Communications Inc. to take a hike.

Buyer Beware: Retail Stocks May Not Pay Off
With Kmart and Sears preparing for a summer wedding and the nation's two biggest department store groups celebrating their engagement, investors may be tempted to start shopping for retail stocks.
Wall Street Is Stuck With Fannie Mae
Fannie Mae's stock finally had a good day on Friday--after a six-day slide that cost its shareholders $6 billion.
Some Troubled Firms Turned Into Top Performers in 2004
Flirting with bankruptcy is getting to be the most reliable way for Washington investors to pick a top-performing local stock.

or stay around $50 and the position would make money. It could even decline below $50 equal to the cost of the premium that was received and the position would break even! The only time the position could lose money is if it declined below this breakeven point. Many option traders specialize in these types of option spreads only and generate often generate steady returns of 10% to 90% per position!

A third advantage is options also give you the ability to short without the restrictions of short-selling stocks. When you short a stock in the anticipation that it will go down in price you not only have a larger cash outlay versus buying put options but you also have to pay interest on the stock you borrowed to short plus you have to pay the dividends back that the stock might pay during the time you hold it. With put options, you avoid all that plus you can make faster returns and much sooner since the will usually fall twice as fast as they rise.

Additionally, if a stock is rumored to miss its earning projections you can make a lot of money quick by playing negative earning releases in the right market environment. The reason is that can often gap down by 50% or more on bad news. That translates into a hug profit to a smart option trader without tying up a lot of capital.

That also brings up the most important advantage is that the most you risk is the actual premium you paid for the option itself. If a stock gaps up or down on news and you’re on the other side of that trade you only risk a small amount of you capital where if you had bought the stock you could lose half your position overnight! Early in 2006, Google reported strong earnings but not as great as Wall Street had expected and the stock was pummeled. Then a few weeks later, Google’s Chief Financial Officer spoke publicly about a temporary pullback in their future growth and the stock plummeted. If an options trader were long Google call options at that time that trader would have only lost a small portion of his overall trading capital versus someone who had bought the stock itself (Google’s stock had been as high as $475 before these events and then lost almost a 150 points in a couple of weeks as a result).

The advantages written here are only a few compared to the dozens that options afford traders who are disciplined enough to learn them. have been likened like playing the game checkers where options are compared to the game chess because of the tremendous opportunity and flexibility that they can give traders and investors. Stock and option traders that take the time to learn and apply a few simple strategies offered by options can better assess risks in the markets and potentially put themselves into positions to profit handsomely.
Mr. Williams is a businessman who has been trading stocks, options, and futures for almost 15 years. He has extensive training in systemic trading and technical analysis along with the insight that comes from suffering the highs and lows from trading for many years. He trades professionally as well as operate an educational website with the goal of helping aspiring traders as well as experienced traders achieve their goals in the stock market. www.stockoptionsystem.com