Options and day trading are two very different investment styles. They use different types of assets and are best for specific people. Day trading is much riskier, even if you have a lot of knowledge in trading.
Options trading is better than day trading for most people. It is less risky and can be pretty profitable. Options require less invested capital and allow you to play the market in several directions. If a stock trade doesn’t go your way, you will lose money. Overall, options are less stressful.
In this article, we will be covering the differences between day trading and options. No matter what you decide to do, you need to know you are as prepared as possible. Keep reading to get all the information that you need.
IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!
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Differences Between Options Trading and Day Trading
There are many differences between day trading and options trading. First, day trading has you working with stocks. That means you are buying a small piece of ownership in a company. The stock should never expire–unless the company goes out of business.
However, in day trading, you are searching for small price rises to sell your stock. In options trading, you can use many different strategies to make a profit. You can sell whether the stock’s value rises, stays the same, or falls.
What Is Options Trading?
In options trading, you are buying and selling contracts. These contracts give you the right to trade an asset before they expire. You will want to know the difference between calls and puts. In short, a call allows you to buy, and a put will enable you to sell the stock. You also need to work with premium prices.
Options derive value from underlying assets. For example, suppose you buy 100 shares of Facebook for $200 with an expiration date in two months. In that case, the value comes from your right to buy, not from ownership in the company.
What Is Day Trading?
In short, day trading is the frequent purchasing and selling of an asset within one trading day. You will need to be familiar with short-term trading strategies, so you can gain a profit from small price changes that occur during the day.
This practice also includes dealing with capital gains taxes and trading commissions, which can add up very quickly. Often, beginners have trouble breaking even because they are paying all of these additional costs.
Day Trading Options
You also can trade your options during the day. If you believe the price will increase, you would buy a call option, then sell it before the end of the trading day. You want to work with plenty of different strategies to get the most back in profits.
This video demonstrates day trading options and how it compares to day trading stocks:
The Benefits of Options Trading
Options trading comes with many benefits. They are less risky and cost less in capital to complete when compared to day trading. If you want more benefits, then options would be better suited to your trading style.
Being Leveraged Investments, Options Can Produce Higher Profits
First of all, options are a leveraged investment. That means you can potentially gain higher profits. However, it also means you are working with borrowed money. The profits you earn are from the difference between the investment returns on the borrowed money and the amount of interest.
Less Capital is Needed to Trade
Leverage allows you to trade more significant amounts of options with less trading capital. If you are just starting with options trading, that feature can be handy to you. Using a well-planned strategy can significantly reduce the risks of leveraged investments.
Play the Market in Any Direction
Options trading works no matter the direction of the market. You can use several different strategies, whether you believe the option’s value will go up or down. When it comes to day trading, you only want the value of your stock to increase. Any other direction and you get a loss.
Before you get started, you will want to be familiar with all of the simple strategies. Options trading strategies can include long calls and long puts- which are the easiest for beginners to learn. Understanding short calls and puts is also essential.
Less Stressful Than Day Trading
Options trading is less stressful than day trading for many people. When it comes to day trading, you need to sell your stock at a particular time each day. That means you have a concise time limit to try to turn a profit.
While options have an expiration date, you can hold onto the asset for much longer amounts of time. You have time to change your strategy to make more capital, leading to less stress. If you don’t want to sit at a computer all day, then day trading will not work for you!
More Profits Gained With Less Money Invested
Finally, you can gain a more significant amount of profit from options trading. You invest less money to earn more due to earning percentages back on the option. Since they use leverages, you receive more from the underlying asset value.
As an example, you have $10k in trading options. This amount could allow you to trade as if you are using $100k since you are trading options and not the stock. Overall, this makes you more in terms of capital, and you risk losing less.
The Risks of Day Trading
According to the U.S. Securities and Exchange Commission, many risks come with day trading. The organization says that many experience large amounts of financial loss when trading- many day traders never make profits.
They also say the job is expensive and very stressful. If you want to avoid the risks associated with day trading, you need to have money to afford to lose or simply never start doing it.
The most considerable risk comes from trading but not investing. You won’t earn dividends from the stock since you don’t keep it longer than a day. If you don’t make a profit during the trade, you lose money.
If you are concerned about the risks that come with day trading, you would be better off trying stocks or trading options. Both are much less risky than day trading, especially for beginners.
Should You Try Options Trading?
Are you trying to decide between options trading and day trading? In most cases, options trading is going to suit you better. It comes with several benefits and allows you to earn more profits.
You will want to learn as much as possible about options trading before you start. We recommend that you visit my blog and read more of my articles. We always include plenty of helpful information in my posts. You may also want to check out the book A Beginners Guide to Investing and Making a Profit and Passive Income by Ray Bears.
Overall, anyone can benefit from options trading, as long as they are well informed. Be sure to read and research as much as you can on the topic before you place your first trade. Day trading is much more challenging and riskier, so we don’t recommend it for beginners.
Author’s Recommendations: Top Trading and Investment Resources To Consider
Before concluding this article, I wanted to share few trading and investment resources that I have vetted, with the help of 50+ consistently profitable traders, for you. I am confident that you will greatly benefit in your trading journey by considering one or more of these resources.
- Roadmap to Becoming a Consistently Profitable Trader: I surveyed 5000+ traders (and interviewed 50+ profitable traders) to create the best possible step by step trading guide for you. Read my article: ‘7 Proven Steps To Profitable Trading’ to learn about my findings from surveying 5000+ traders, and to learn how these learnings can be leveraged to your advantage.
- Best Broker For Trading Success: I reviewed 15+ brokers and discussed my findings with 50+ consistently profitable traders. Post all that assessment, the best all round broker that our collective minds picked was M1 Finance. If you are looking to open a brokerage account, choose M1 Finance. You just cannot go wrong with it! Click Here To Sign Up for M1 Finance Today!
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Conclusion
There are many differences between options trading and day trading. If you want less risk, then options trading will be the better method for you to use. It comes with several benefits that day trading can’t offer to you.
So, is options trading better than day trading? We would have to say that it is! If you have any questions, be sure to reach out or read more on TradeVeda.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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