Stocks vs. Options

The first thing to point out in this part is the fact that options are not the same as stocks. Just because a person thinks that a stock is going to increase it does not mean he can purchase just any call option in the group. Options are not only susceptible to the course, but they are also sensitive to the time that remains before the expiration time and on how volatile the market it at that time. Stock trading on the other hand, only has one dimension to it. The only factor in this case has to do with the price, and whether its direction is going up or down. Options on the other hand have three dimensions because three different big factors need to be taken into consideration as we previously mentioned, these items include, price, time and volatility. After a person purchases a stock, they have a cost basis point. This is whatever they paid for the stock along with the commission. One will hold on over a matter of time (this can even be years in some cases) to see how far the stock goes up and over the cost basis you had or a breakeven price. The one thing that investors do have with stock is the time factor. An investor has the choice of waiting years if he likes, or he can pass the stock down to others if he wishes to do so. Stock options and commodity options however, do not work in the same way. These all have a limited life span. If the stock or commodity price does not go over the breakeven by option expiration, the investor losses his money. Therefore, the focus in the options market is to know how to pick the best strike prices so they maximize one’s likelihood of making a profit.