Better to buy options or stocks

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Options vs Stocks which is more profitable.
Assuming I enter a stock at $100/share. The stock goes up 3% over the course of two days, I then sell the stock and collect my profits. How would this compare to me buying a call option contract for the same stock and profiting off of the option by it going up 3% and exiting at essentially the same point as the normal stock? I was wondering if somebody with experience in options can basically compare how all phases would pan out for the options route (entering the market, setting a trailing stop, exiting the market, etc) and how it compares to simply buying stock - while taking in to consideration the trading fees, option premiums, other costs associated with each approach.
whichever route I take - stocks or options and I am trying to determine which is most suitable for me assuming the stocks I pick profit anywhere from 3-5%.
I appreciate any clarification.
Nearly 3 years ago, I wrote an article, Betting on Apple at 9 to 2 which described a bet in which a 35% move in the stock returned 354% on the option trade. Leverage works both ways, no move, or a slight move down, and the bet would have been lost. While I find this to be entertaining, I don't call it investing.
With $2-$3K, I recommend paper trading first, and if you enter option trades, no one trade should be more than 20% of this money. If you had $50K in betting money, no position over 10%.
The first thing that I learned the hard way (by trying my hand at actual options trading) is that liquidity matters. So few people are interested in trading the same options that I am that it is easy to get stuck holding profitable contracts into expiration unless I offer to sell them for a lot less than they are worth.
I also learned that options are a kind of insurance, and no one makes money (in the long run) buying insurance.
So you can use options to hedge and thereby prevent losses, but you also blunt your gains.
Edit: IMO, options (in the long run) only make money for the brokers as you pay a commission both on the buy and on the sell. With my broker the commission on options is higher than the commission on stocks (or ETFs).
First, to mention one thing - better analysis calls for analyzing a range of outcomes, not just one; assigning a probability on each, and comparing the expected values. Then moderating the choice based on risk tolerance.
But now, just look at the outcome or scenario of 3% and time frame of 2 days. Let's assume your investable capital is exactly $1000 (multiply everything by 5 for $5,000, etc.).
A. Buy stock: the value goes to 103; your investment goes to $1030; net return is $30, minus let's say $20 commission (you should compare these between brokers; I use one that charges 9.99 plus a trivial government fee).
B. Buy an call option at 100 for $0.40 per share, with an expiration 30 days away (December 23). This is a more complicated. To evaluate this, you need to estimate the movement of the value of a 100 call, $0 in and out of the money, 30 days remaining, to the value of a 100 call, $3 in the money, 28 days remaining. That movement will vary based on the volatility of the underlying stock, an advanced topic; but there are techniques to estimate that, which become simple to use after you get the hang of it. At any rate, let's say that the expected movement of the option price in this scenario is from $0.40 to $3.20. Since you bought 2500 share options for $1000, the gain would be 2500 times 2.8 = 7000.
C. Buy an call option at 102 for $0.125 per share, with an expiration 30 days away (December 23). To evaluate this, you need to estimate the movement of the value of a 102 call, $2 out of the money, 30 days remaining, to the value of a 102 call, $1 in the money, 28 days remaining. That movement will vary based on the volatility of the underlying stock, an advanced topic; but there are techniques to estimate that, which become simple to use after you get the hang of it. At any rate, let's say that the expected movement of the option price in this scenario is from $0.125 to $ 1.50. Since you bought 8000 share options for $1000, the gain would be 8000 times 1.375 = 11000.
D. Same thing but starting with a 98 call. E. Same thing but starting with a 101 call expiring 60 days out. F., . Etc. - other option choices.
Again, getting the numbers right for the above is an advanced topic, one reason why brokerages warn you that options are risky (if you do your math wrong, you can lose. Even doing that math right, with a bad outcome, loses).
Anyway you need to "score" as many options as needed to find the optimal point. But back to the first paragraph, you should then run the whole analysis on a 2% gain. Or 5%. Or 5% in 4 days instead of 2 days. Do as many as are fruitful. Assess likelihoods. Then pull the trigger and buy it.
Try these techniques in simulation before diving in! Please!
One last point, you don't HAVE to understand how to evaluate projected option price movements if you have software that does that for you. I'll punt on that process, except to mention it.
Get the general idea?
Edit P. S. I forgot to mention that brokers need love for handling Options too. Check those commission rates in your analysis as well.
More perspective on whether buying the stock ("going long") or options are better. My other answer gave tantalizing results for the option route, even though I made up the numbers; but indeed, if you know EXACTLY when a move is going to happen, assuming a "non-thin" and orderly option market on a stock, then a call (or put) will almost of necessity produce exaggerated returns. There are still many, many catches (e. g. what if the move happens 2 days from now and the option expires in 1) so a universal pronouncement cannot be made of which is better. Consider this, though - reputedly, a huge number of airline stock options were traded in the week before 9/11/2001. Perversely, the "investors" (presumably with the foreknowledge of the events that would happen in the next couple of days) could score tremendous profits because they knew EXACTLY when a big stock price movement would happen, and knew with some certainty just what direction it would go :(
It's probably going to be very rare that you know exactly when a security will move a substantial amount (3% is substantial) and exactly when it will happen, unless you trade on inside knowledge (which might lead to a prison sentence). AAR, I hope this provides some perspective on the magnitude of results above, and recognizing that such a fantastic outcome is rather unlikely :)
Then consider Jack's answer above (his and all of them are good). In the LONG run - unless one has a price prediction gift smarter than the market at large, or has special knowledge - his insurance remark is apt.
As already noted, options contain inherent leverage (a multiplier on the profit or loss). The amount of "leverage" is dictated primarily by both the options strike relative to the current share price and the time remaining to expiration. Options are a far more difficult investment than stocks because they require that you are right on both the direction and the timing of the future price movement.
With a stock, you could choose to buy and hold forever (Buffett style), and even if you are wrong for 5 years, your unrealized losses can suddenly become realized profits if the shares finally start to rise 6 years later. But with options, the profits and losses become very final very quickly. As a professional options trader, the single best piece of advice I can give to investors dabbling in options for the first time is to only purchase significantly ITM (in-the-money) options, for both calls and puts. Do a web search on "in-the-money options" to see what calls or puts qualify. With ITM options, the leverage is still noticeably better than buying/selling the shares outright, but you have a much less chance of losing all your premium. Also, by being fairly deep in-the-money, you reduce the constant bleed in value as you wait for the expected move to happen (the market moves sideways more than people usually expect).
Fairly - to deeply-ITM options are the ones that options market-makers like least to trade in, because they offer neither large nor "easy" premiums. And options market-makers make their living by selling options to retail investors and other people that want them like you, so connect the dots. By trading only ITM options until you become quite experienced, you are minimizing your chances of being the average sucker (all else equal).
Some amateur options investors believe that similar benefits could be obtained by purchasing long-expiration options (like LEAPS for 1+ years) that are not ITM (like ATM or OTM options). The problem here is that your significant time value is bleeding away slowly every day you wait. With an ITM option, your intrinsic value is not bleeding out at all. Only the relatively smaller time value of the option is at risk. Thus my recommendation to initially deal only in fairly - to deeply-ITM options with expirations of 1-4 months out, depending on how daring you wish to be with your move timing.

Penny Stocks Vs. Options-Which Is Better to Trade?
Are you looking to begin trading in the stock market? The key word here is “begin”. When most new traders are beginning to trade, they don’t have massive amounts of money to work with. Because of this, they quickly realize they don’t have the account size to be able to trade big board stocks like Apple and Netflix.
Due to this, many traders embark on a quest to find something that can help with their situation. After going through search engines and other forms of internet searching, many times they are drawn into penny stocks due to the promises of large account expansion with little money required. It would not shock me at all if you’ve already taken a look at penny stocks, as they have a much lower cost of entry and can offer those promised “off the charts” gains.
My real question to you is this: have you taken a look at options? Maybe you aren’t sure what the difference is? Keep reading as I’ll cover the differences between penny stocks and options so you can make the best decision for your personal trade plan and goals.
I’ve broken this comparison down into nine different sections, let’s just take it section by section and Ill address penny stocks and options in each section.
Commissions/Fees/Regulations.
When trading both penny stocks and options, assuming you have a discount broker, the fees are virtually the same, so the cost of trading is a wash. Sure, some brokers are better than others for penny stocks just like some brokers are better than others for options, but all in all, if you find the right broker for what you are wanting to trade, it's an even match up. However , with penny stocks you are restricted by the pattern day trader rule that limits you to only three “day-trades” a week if your account is under $25k. With options, you are not subjected to this rule (learn how to avoid the pattern day trading rule with options) When it comes to regulations, options wins, hands down.
Number of Trading Opportunities.
What do I mean when I say “opportunities”? Well simply put, this means the frequency in which a viable trade situation comes around where you could realistically make money. In the penny stock world, a given stock can go months at a time with very little or no movement. It can sometimes be really hard to actually find a penny stock that is moving and is setting up for a trade. Why is this the case? By nature, the penny stock market is very illiquid, meaning there just isn’t much trader activity. Traders must buy and sell amongst one another to create volume (liquidity), and there just is not large consistent amount with penny stocks. Options on the other hand are based off of big board stocks and ETF’s. With these types of stocks/ETF’s, there is a consistent and routine high amount of volume each and every day, hence making it much easier to find an opportunity that gives you a realistic chance to pull profits from the market.
Potential Trade Gains.
The allure of both penny stocks and options is the low cost of entry and high percentage gains, so if all else was created equal, this would be a tie. For the numerous downfalls of penny stocks, to be fair, penny stocks if they can get moving can certainly make large jumps in price. Keeping things in perspective though, when we bring opportunities (see above discussion) into the equation we see that options have the ability to allow for these types of gains much more frequently.
Cost to “Get Involved” in the Trade.
As mentioned a couple times already, both penny stocks and options have a fairly low barrier to entry. Meaning the cost to start trading is quite low. In both cases, $1,000 or maybe even less would be more than enough to get started.
Your Trade Plan is at the Mercy Of…
In the trading world, you want to be able to put yourself in situations with as many variables remaining unchanged as possible. When it comes to penny stocks this can be hard. Often times the management is a very flakey and does not act in the company’s best interest. You are really at their mercy as they could make some bone-headed announcement or decision that causes a large drop in the price and therefore destroys the position you are holding and leave you flailing in the wind. Options on the other hand are based on big board stocks. These are large companies that have tried and true records, and are run by a highly intelligent management teams and board of directors. In other words, there is rarely any drama with a big board company. You can count on these companies being run well and won’t have the violent swings in management. With penny stocks, “drama” is a commonly used (and rightfully so) word to describe them.
How Fluid is Trading (volume)?
Fluidity is a big issue when it comes to penny stocks. Many times if you pull up a penny stock technical chart the price is jumping all over the place and the chart as a whole appears “choppy”. I’ve discussed this a bit already, but this is due to the small and inconsistent amount of volume of shares being traded. This creates the problem of unreliable technical indicators, chart patterns, and a host of other tools that traders attempt to use. Options, being based on big board stocks, have much higher volume. The best way to illustrate this is to tell you to go and pull up a penny stock and a big board stock, both looking at the 5-minute time scale. You’ll see that the big board stock has a much more fluid trading pattern. The penny stock chart will be very choppy looking and may not even look like much of a chart at all. By being more fluid decision making and reliability with options makes it much easier to identify patterns and trends in the chart.
How Easy Can You Sell?
There are two parts of a successful trade, buying and selling. This may seem very obvious, but it is the part that most new traders do not understand. Remember, you can always “buy”. But in order to “sell”, there has to be someone who wants to buy from you. This is getting repetitive I know, but I hope you are seeing the massive problem of volume. Because in penny stocks there is not a huge amount of volume, at times it can be VERY difficult to find a buyer for your penny stock shares when you want to sell, especially if you put in larger amounts of money. With options and their higher volume, there is almost always someone out there looking to buy. In other words, using an economics term, it is a very efficient market.
Making Money Flexibility.
How many different strategies can you run? With penny stocks you are limited to just going long in the stock. Technically, you can short penny stocks, but finding the right brokers is an annoying quest at best. On top of this, the fees associated with shorting penny stocks (due to the HIGH risk involved) are extremely high. Point being, you can only make money within penny stocks when the stock price goes up. Options allow for 100% flexibility. Whether the price goes up or down, the way options are structured give you the opportunity (you’ve seen this word before!) to still profit. To spice things up that much more, with some of the more advanced option strategies you can even make a profit if the price of the stock sits still and does nothing.
Learn Personalities.
As any seasoned trader who has been around will tell you, every stock has a personality. If you follow one stock long enough you can begin to learn and identify with that personality (defined as “how the stock tends to move”) and use that to you advantage. With penny stocks this is hard and essentially impossible. In the vast majority of instances, the stock “in play” is good for a few days/week and maybe a couple months before it drifts into oblivion. Because penny stocks that are “in play” are constantly changing, this cycle makes it nearly impossible to identify the personality of any given stock. With options there are many stocks that day in and day out are consistent with activity. Therefore, it allows traders to learn “how” the stock price tends to move.
Final Thoughts.
If I do my math correctly it looks like we have a score of 7 to 2 in favor of options. Does these mean you shouldn’t trade penny stocks? Absolutely not, if penny stocks fit better into your strategy and plan, then by all means go that route. However, based on my experience as a trader and teacher, often people who started out trading penny stocks eventually move to options for many of the reasons listed above (and talking with these people is how I’ve constructed this list). Penny stock traders eventually get sick of tired of “watching paint dry” as they wait for their positions to move. Others simply become frustrated because while sure, they can buy shares, when it comes time to sell those shares (for either a profit or a loss), it can turn into much more than just a click of the “sell button”. All in all, you need to put as many odds in your favor as possible, and the reality of the situation is that options trading allows you much more freedom, opportunity and flexibility.

Is it Better to Buy Options Than Stocks?
Options are listed in major financial newspapers.
The classic way you make money in the stock market is to buy low and sell high. Of course, there is always the possibility that you will buy high and sell low, resulting in a loss. You can limit your risk while maintaining unlimited potential gains by investing in stock options instead of stock. That doesn't means options are a better investment than stocks. It just means you have more, well, options.
Every share of stock represents an equal amount of ownership in a company. Owning stock gives you the right to participate in the company's growth and to share in its losses. There are two primary ways to make money with stocks. You can sell your stock for more than you paid for it to generate capital gains. Your stock may also pay dividends, which represent your pro rata share of the company's profits. Not all stocks pay dividends, and there is always the possibility that the market price of your stock will decline, so there are definitely some risks associated with buying stock.
An option does not give you ownership in the company, but it does give you the right to purchase or sell a specific number of shares of stock at a set price, called the strike price, for a set period of time. Options are traded at a fraction of the price of the underlying stock. Once an option reaches its expiration date it becomes worthless and ceases to exist. If the price of the underlying stock drops like a rock, your risk is limited to the amount you paid for the option. If the price of the stock goes through the roof there is no limit to how much money you can make on your option.
Risk vs. Reward.
There are a number of options strategies, but the most common is buying and selling call options. Each call option give you the right to purchase 100 shares of the underlying stock at the strike price. Your investment in a call option will cost you considerably less than buying 100 shares of stock. The potential upside for both the call option and the underlying stock is theoretically unlimited. The potential downside for both the call option and the underlying stock is the loss of 100 percent of your investment. You will only lose all of your investment in stock if the company goes bankrupt and there are no assets left. You are guaranteed to lose all of your investment in an option if it expires before you either sell it or exercise it.
Investment Objectives.
You must determine your investment objectives and your investment temperament before you can determine whether options or stocks are the better investment for your portfolio. If your objective is to create a steady stream of income by accumulating a portfolio of dividend-paying stocks, buying options won't do you much good. If you have limited funds, but want to participate in an anticipated rise in the market price of a particular company, an option might be your best bet.
References.
About the Author.
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.
Photo Credits.
Thinkstock/Comstock/Getty Images.
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Three Ways to Buy Options.
When you buy equity options you really have made no commitment to buy the underlying equity. Your options are open. Here are three ways to buy options with examples that demonstrate when each method might be appropriate:
Hold until maturity.
. then trade: This means that you hold onto your options contracts until the end of the contract period, prior to expiration, and then exercise the option at the strike price.
When would you want to do this? Suppose you were to buy a Call option at a strike price of $25, and the market price of the stock advances continuously, moving to $35 at the end of the option contract period. Since the underlying stock price has gone up to $35, you can now exercise your Call option at the strike price of $25 and benefit from a profit of $10 per share ($1,000) before subtracting the cost of the premium and commissions.
Trade before the expiration date.
You exercise your option at some point before the expiration date.
For example: You buy the same Call option with a strike price of $25, and the price of the underlying stock is fluctuating above and below your strike price. After a few weeks the stock rises to $31 and you don’t think it will go much higher - in fact it just might drop again. You exercise your Call option immediately at the strike price of $25 and benefit from a profit of $6 a share ($600) before subtracting the cost of the premium and commissions.
Let the option expire.
You don’t trade the option and the contract expires.
Another example: You buy the same Call option with a strike price of $25, and the underlying stock price just sits there or it keeps sinking. You do nothing. At expiration, you will have no profit and the option will expire worthless. Your loss is limited to the premium you paid for the option and commissions.
Again, in each of the above examples, you will have paid a premium for the option itself. The cost of the premium and any brokerage fees you paid will reduce your profit. The good news is that, as a buyer of options, the premium and commissions are your only risk. So in the third example, although you did not earn a profit, your loss was limited no matter how far the stock price fell.
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