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Stock Trading vs Options Trading - Options Trading For Beginners - YouTube
Channel: Option Alpha
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Hey there it's Kirk here again from optionalpha.com
and in this video we're going to be talking
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about the differences between stock trading
and options trading.
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And I think what's going to be really cool
about this video hopefully is that we're not
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going to have a lot of slides with all these
differences and benefits versus drawbacks,
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because I think it really comes down to a
couple key things and we're going to be going
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through that here.
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But I hope that you understand, really, the
benefits that options trading has over stock
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trading by the end of this video.
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And by no means am I trying to say that stock
trading is bad, or you can't do it, or you
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can't make it work.
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In my personal opinion, I think options trading
gives you, no pun intended, more options,
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more opportunity with less risk than does
stock trading and that's what we are going
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to talk about here in this video.
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So for me, I think the difference between
these comes to down to basically two things.
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Now a lot of people email me and tell me it's
a lot of different things, but really it comes
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down to two things.
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It comes down to leverage and it comes down
to choice.
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With options trading you can use leverage
to your advantage.
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Now obviously leverage can be a bad thing
if you use it the wrong way, if you over allocate,
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if you are stupid with your entries, leverage
can work against you.
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But one of the key benefits of using and trading
options is that you have an incredible amount
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of leverage to enhance your returns and reduce
risk at the same time.
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The second part of this is choice.
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When you trade stocks you are very, very limited
on choice.
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Basically two choices: buy or sell.
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When you trade options you have a lot of different
choices.
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You can basically mold or create a strategy
that works based on whatever assumption you
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have about that particular stock.
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It's not just buy or sell, it's is the stock
going to be range bound or not?
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Is it going to move higher or lower?
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Or is it going to move generally higher, but
maybe move a little bit lower?
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There's a lot of different ways that you can
create and build complex strategies that work
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to your advantage that is not just limited
to the decision of is the stock going to go
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higher or is the the stock going to go lower,
okay?
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So let's go through a lot of examples here.
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We just got a quick screenshot here of a chart
of a particular stock.
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Doesn't matter what the stock is, but it's
trading around $10, which makes it really,
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really easy for us to kind of go through.
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And again, this is just part of the stock
chart, we don't even need to see what the
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rest of it is.
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But current stock price when we took this
screenshot was about $10 per share.
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Now here's the deal: if you are trading stock
you can basically draw a line in the sand
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here at $10 and that is your decision point.
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And that's really it, there's nothing else
that's beyond that that you can do.
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Meaning you can either buy the stock at $10
and if it goes higher you make money.
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Or you can sell the stock at $10, short it
whatever the case is, and if it goes lower
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then you can make money.
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But this line in the sand is it for you.
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It's basically whatever the stock price is
right now, $10, 12, 14, 126, whatever the
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stock price is that is the point at which
you make or lose money because you are either
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going to buy stock or sell stock.
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Now the benefit to doing that is that you
have an unlimited amount of time to be right.
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Meaning you can buy stock today and you can
wait for 10 years to be right or you can be
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right over night, or whatever the case is.
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But you do have an unlimited amount of time
as long as you can hold onto the stock and
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carry that stock with you that you can be
right.
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So that is the biggest benefit in my eyes
of seeing the stock and of course that's discounting
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dividends and stuff like that which you'll
get along the way.
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I don't think that makes up for the biggest
benefit is just holding longevity of the stock.
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Now when it comes to options, on the hand,
you have a lot different choices again or
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options.
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And actually let me just back up and say one
thing.
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With stock if you're going to buy stock, you've
got to buy it at the current stock price and
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share price.
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Meaning that you have to outlay $10 per share.
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So let's say we wanted to control or own 100
shares of stock.
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At $10 we'd have to basically outlay $1000
out of our pocket for the entire position.
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So now we have $1000 of risk, real risk in
the market, that we have out there that if
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the stock price drops dramatically we're going
to lose money on.
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So it's very capital intensive to go out and
buy stock and again this is just 100 shares
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of a $10 stock.
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We're not even talking about some stocks out
there that are $80, there are stocks out there
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that are $500, $600 a share.
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So to build a position in those requires a
lot of capital.
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And again, if the stock price goes from $10
to let's say $12, sure you make $200 but you
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took on, in my opinion, a lot of risk to do
that.
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Because you just basically drew a line in
the sand that says hopefully the stock goes
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above $10 and if it goes to 12 then I make
a little bit of money on my $1000 investment
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in the security.
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Okay now circling back, if we were to enter
an options contract, and I'll go through a
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couple different examples here because I think
it's worth it, if we were to enter an options
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contract and let's say we were bullish on
this stock, then we might go out and we might
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buy a 12 strike call option.
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Now again at this point in the training, if
you are going through our track here on Option
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Alpha, we'll get into a lot of these call
options, put option stuff in a lot more detail
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but just follow me here because I think the
concept is really, really important to understand.
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But let's say we think that the stock is going
to go higher than $12 and let's say that this
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dotted red line here, which is an actual expiration
date on our platform, is the point at which
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we set our expiration.
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So we basically say if the stock goes above
$12, so anything over here basically in this
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zone, if the stock goes above $12 then we
make the difference between 12 and where ever
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the stock is 14, 16, 18, 20 whatever the case
is.
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But instead of actually having to buy the
underlying stock at $10 a share right now
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and outlay all of that money, we might be
able to control with one option contract we
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might be able to control 100 shares of this
stock for let's say $50, okay?
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And that's just again using some round numbers
here so it makes it real easy.
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But we might be able to buy an options contract
at $12 as a strike price and control 100 shares
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of this stock for just $50.
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So now if the value of the stock let's say
goes up to $14 by expiration, now we have
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made a $200 difference in value based on $50
of investment, okay?
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So now you can see the power and the leverage
of options on a very basic example, okay?
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Maybe not a trade you would do, maybe not
a trade that I would do, but it proves the
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point that you can get a lot more options
and choices with less leverage and potentially
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less risk by using some options contracts,
okay?
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Another quick example and this is now, just
to be fair with this 100%, I'm not in favor
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of buying options as a way of running your
business.
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We are here at Option Alpha and I am much,
much more of an option seller, 95% of the
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time I'll be selling options I won't be buying
options.
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So the way that I structure some of my strategies
is the following.
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I will look at a stock like this and I will
say, okay if the stock is trading at $10 a
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share, I will build an options strategy that
profits as long as the stock stays between
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let's say $14 and $8 on the bottom side.
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And again, the specifics of this we'll go
through in further trainings here at Options
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Alpha, but again the concept is really, really
key because this is the difference between
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stock trading and options trading.
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So we'll build a strategy with options that
basically says look, I don't care where the
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stock goes as long as it trades in the next
month or two months, whatever the timeline
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is between $14 and $8, okay?
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So as long as the stock trades somewhere in
this range, it can trade at 801, it can trade
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at 13999, right?
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But as long as it trades between 14 and 8,
between now and expiration, then we take in
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some premium on this trade or some consideration
for selling these options.
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In that case that might be let's say $100
or $200 whatever the case is.
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So now with options, versus just buying the
stock outright and hoping it goes up or down,
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now we can build this framework based on our
assumption of where the stock may go or in
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my case where the stock may not go.
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So I'll use probabilities and implied volatility
analysis to determine where I think there's
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a high likelihood of the stock trading and
build a strategy around that so that I profit
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and give myself a lot of wiggle room.
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And the reason I love this type of strategy,
and this is kind of like our general theme
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and concept here at Option Alpha, is that
I don't have to be really good at picking
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the direction the stock goes.
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I just have to give myself enough room for
the stock to move and still make some money.
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So in the case of this stock that we're trading
right here, I don't have to be right in saying
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I think the stock is going to go higher or
I think the stock is going to go lower.
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I can outlay a little bit of money and basically
make an assumption that the stock just doesn't
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go as high as 14 or as low as 8 and then I
can make some money on my trades.
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And for me that's how we create these high
probability opportunities.
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In this case this trade might have a 70% chance
of success based on the historical movement
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of the stock and implied volatility.
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That is a known number, it's factual number,
we can document that number going through
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many, many trades and many set ups like this,
okay?
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We can basically pin any trade that we want
at whatever probability of success we won.
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It is also known that where ever the stock
is trading right now there is a 50/50 shot
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of the stock going higher or lower.
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No matter what anybody tells you, that is
the number.
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Those are the numbers that have been that
way for a long, long time.
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Every single day the market still has a 50%
chance of going higher or lower the next day.
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Can markets trend, can they move in certain
directions?
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Yes, but every day the stock now has a new
50/50 shot of moving higher or lower into
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the future.
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And so we don't know where it's going to go.
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So that's why I prefer options trading over
stock trading.
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I don't want to make this 50/50 decision and
win on one side and lose on one side.
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I would much rather build a strategy that
says I'm going to win 70% of the time or 80%
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of the time and I don't care which way the
stock is going to go, okay?
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So hopefully that was a really good example
of how we use options and again the basic
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overall differences between stock trading
and options trading.
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Like I said, just to recap, stock trading
is one directional and capital intensive for
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investors.
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You've got to buy the stock and you're one
directional.
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No matter what anybody says, you are choosing
a direction: buy or sell.
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You're going up or you're going down.
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That's it.
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There's nothing else you that you can do.
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With options trading, you can use leverage
meaning you can put up a little bit of money
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and control a lot more shares and this reduces
risk and it enhances potential profit and
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you can profit from multidirectional moves
in the stock.
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Meaning you can build strategies that basically
profit from multidirectional moves.
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The stock goes a little up or a little down
or stays range bound or sideways, you can
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still build a strategy to profit around that
type of scenario.
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So in our opinion here at Option Alpha, naturally
we believe and we found because we have been
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doing this for a long time, that options trading
gives us much more of a competitive edge in
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the market than trying to pick directional
assumptions.
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So as always I hope you guys enjoy these videos.
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If you have any comments or questions, please
ask them right below.
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If you love this video please share it online
with others, help us spread the word about
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what we are trying to do here at Option Alpha.
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