Stocks vs Options – Which Are More Risky ? The Answer May Surprise You!

The other day as Greg and I were tending over the chickens, we started up a friendly debate about which are more risky, options or stocks. On one hand when you buy shares of a company and it goes down a bit, you have the luxury of time to wait it out and let the stock come back (hopefully) to where you bought it at, or possibly a profit. However, when you buy an option, you have a limited amount of time to make a profit and then it goes to zero.

Options traders think a bit differently and they like to make as efficient use of capital as possible within a defined time horizon. If an options trader and a stock trader both have 400 dollars, they both want to maximize the return as quickly as possible. If you define the time horizon, the stock trader has a 50/50 shot of making a profit and the stock must go up for the trader to make a profit. The options trader however might look at the volatility of the stock and have a more neutral assumption about where the stock will go.

Take Tesla (TSLA) for example. Today it is trading at 204. It could go up or down a little if the options trader uses that 400 dollars in buying power to  create an iron condor with a 65% probability of making 1 penny or more, and a 79% probability of making 68$ or more! Assuming you are only looking to take 50% of max profit ($136 / 2= $68) within the next 40 days, that’s an 18% return ($68 profit / $364 risked) per contract, with a better than 50% chance of success! With this, TSLA could move to 163 or 251 (the “breakeven” on both sides.) If one just owned the stock, you would have to pray the stock moves in 1 direction (up) and makes it to around 270 dollars in the next 40 days to make the same amount.

TSLA Iron Condor Option
TSLA Iron Condor Option

 If you have the capital and the luxury of time, you could certainly afford to wait it out, but if you want to repeat a controlled experiment each month with a stock or ETF and let the probabilities play themselves out over time in your favor, try the iron condor.

Greg and Jerry use tastyworks for all our options trades. If you sign up through our referral link, we may be compensated in some way.

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