Five Ways Options Trading Is Different than Day Trading

Options and day trading are two exciting areas of the marketplace. With frequently changing positions and a high degree of flexibility, it can sometimes be difficult to determine which is the right choice for your portfolio. Here are a few of the major differences to help investors make the right call.

First, though, neither of these techniques are for novice investors. If you don’t know your puts from your profit targets, take the time to do all of your research before investing the first dollar. It’s easy to lose a lot of money in both of these markets and there’s no rush.

Here’s a great place to start:

#5. Day traders make a purchase, options plan one.

The biggest difference between day and options trading is the nature of the contract: ( Day traders buy stocks outright, while options traders buy the right to purchase at a given date and price if they choose.

An options trader essentially gets the first right of refusal, a long-term contract that derives its value from the underlying asset. A day trader owns the actual asset, for however briefly.

#4. Options are often higher value.

Many day traders focus on volatility, buying and selling a lot of stocks based on small price fluctuations. ( It may not seem like much, but a quarter-percent difference can add up to real money across thousands of trades.

Options rarely profit from volatility or small gains. Instead, a trader might wait weeks or even months for his prediction to materialize, a timeframe over which most traders will wait for substantial gains.

#3. Day trading focuses on trends, options focus on benchmarks.

A day trader invests around financial benchmarks, hoping for growth and controlling her position with profit and stop-loss targets. Options traders buy their contract fixed to a concrete value prediction.

The key difference is speculation. A day trader thinks he knows how a stock will trend, but an options trader thinks he knows specific targets that the stock will hit and when it will hit them.

#2. Day traders can mitigate losses, options traders have a fixed investment.

The loss profiles particularly differentiate day trading from options.

An options trader limits his losses to the premium on the contract, as he can choose not to exercise his option to purchase. ( However, while fixed, the probability of that loss is much higher.

A day trader could hypothetically lose the whole value of her investment if a stock goes very bad. She can also sell her position at any time, though, allowing her far more control to mitigate losses or accept a smaller profit.

#1. Day trading allows flexible positions, options do not.

An option doesn’t hold any inherent value. It only pays off if the stock is worth more than the contract’s strike price at the precise time of the call. Otherwise, the investor gets nothing for his money.

A day trader gets an asset, one which she can hold or sell if she chooses to change her trading position. ( The result is far more flexibility to respond to market conditions.

So, which of these markets is right for you? It depends on your investment profile, but options, in particular, can be a way to round out the risk in an average portfolio with sound advice.

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