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Do you prefer trading options over stocks even though options are riskier?

Options are not riskier, in fact, they are safer than stocks.

Here is an example:

Trader A buys 100 shares of a stock ABC for $30 a share.
Trader B sells a put contract of underlying ABC with 26 strike and collects 0.31 credit.

Stock drops to $24 a share.

Trader A is sitting at $600 loss.

Trader B is forced to buy 100 shares of ABC stock for $26 a share with a cost basis of $25.69 and sitting on a loss of $169.

Trade A losing $600, trade B losing $169…

So which instrument is riskier? Stocks or options?

Yes, you can lose money with options if you do not know how to use them, but you can lose money with stocks too, and in fact even more. If you trade options on margin for example, and you are undercapitalized, then yes, you will lose money.

For example, you have only $5,000 dollar account and you sell a put spread against Amazon stock which is 10 dollars wide. Your broker takes $1000 collateral. But then a stock drops and you get assigned. Suddenly, you need 92,500 (in a margin account) or 186,000 (in a cash account) and you are forced to sell your position for a loss because you get a margin call.

And where is the risk? In the options you traded or your recklessness trading options with underlying for which you didn’t have enough capital because you were greedy and wanted that juicy premium?

So, options are not riskier. Stocks are riskier. But an investor with lack of knowledge is the most risky to himself/herself.

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