When it comes to wagering, many people assume that they have to choose between betting on one team or the other in a horse race – but not necessarily. There are times when it is better to bet against the popular choice and times when it is better to go with what you know.
The same can be said about individual stocks. When you go long on a stock, you are basically saying that you think the price will go up. When you go short on a stock, you are saying that you think the price will go down. So, if you are watching a particular stock, you might decide to bet on it moving in a particular direction (either up or down). This article will explore the difference between betting in favor and against an option, stock, or commodity, and why betting on the unpopular choice might be the right move in some cases.
Option Vs. Stocks
When you look at the overall performance of options and stocks, they are pretty similar. As an investor, if you are choosing one of these three investments avenues, you are probably wondering which one is the better choice at this point in time. One of the best places to examine the performance of options and stocks is at fxmeadow.com, a site that benchmarks the performance of different financial instruments across various time frames.
You can use this tool to examine the performance of an option or a stock over a certain time period, and it will provide you with all the necessary information. For example, say you are interested in examining the performance of a call option on Netflix (Nasdaq: NFLX) over the last three months. You would enter the following information into the formula:
Netflix is an S&P 500 stock (symbol: NFLX). You are looking for monthly performance over the last three months.
The resulting output will tell you that the cheapest (in terms of cost) way to play the option on Netflix is to put $10 on the blue box when the stock trades at $345 a share. Alternatively, you could go long on Netflix when it trades at $415 a share (based on $10 per share). Because the volatility of Netflix is relatively low (based on three months of data), there is a wide range of opportunities for traders – especially less experienced ones. For instance, you could use a small position in Netflix or a large position in order to generate some extra earnings from an options trade.
A call option is a type of option that gives the right to buy the underlying stock (in this case, Netflix) at the strike price (the price at which you bought the option) – for a certain number of shares or dollars. A put option is the opposite: it gives the right to sell the underlying stock at the strike price (for a certain number of shares or dollars).
Because options are a relatively new development within the investment world, there are not a lot of established rules on how to choose the right pair of options when trading. However, there are a few key points to keep in mind:
Equal Time
One of the fundamental requirements for an options strategy is that you have to use equal time. This means that you have to set aside an equal amount of time for watching the price action of the underlying stock (in this case, Netflix) and for monitoring the progress of the option. It is easy to get distracted by other news events that surround a trending topic or topic-related stock like Netflix – but this can leave you vulnerable to sudden moves in the market. In some cases, this can result in you missing out on profits because you were distracted by something else.
No Short-Selling
Many people who trade options for a living believe that short-selling is one of the most important things that they have to avoid when putting together an options strategy. When you short a stock, you are saying that you think the price will go down. This means that if you are looking to profit from a short-sale, you have to buy the option with the intention of later covering your position with a sale. Short-selling is generally considered to be a high-risk/high-reward strategy, especially when implemented by less experienced investors.
Volatility Matters
Even if you intend on being long (or short) on a particular option or stock, you have to keep in mind that the overall volatility of the strategy will determine how much you should be earning or losing on any one trade. If you are looking for a low-risk way to generate some extra income, you could look at options for stocks that trade in small markets where there is a lot of volatility. In these cases, much of the risk is mitigated by the fact that there are fewer participants in the market.
As an investor, you should try to look at the overall history of an option or a stock before making a decision. In some cases, an overlooked earnings report or a rumor about a pending merger can cause a stock (or option) to spike (or decline) suddenly and unexpectedly. In these kinds of situations, you might want to consider taking a position in the other direction (either up or down) than what you initially intended – especially if this other option appears to be the safer choice.
Consider the option (or stock) known as FND (Fiat n. dimmo), which is the short-form of the name Facebook. This is a stock that was nearly erased from the market over the last year, only to see a sharp spike in share price after it was revealed that the founder of Facebook, Mark Zuckerberg, owns a significant amount of stock in the company. Even though this is a heavily-leveraged investment carried out by a very wealthy individual, one could make the argument that this is an example of where it is better to be on the short-side of a trade. It might be a safer choice, given Zuckerberg’s history of pumping up his company’s profile and share price with little-to-no regard for the long-term health of the company.
Know When To Get Out
When you get too deep into watching the short-term price action of an option or a stock and not considering the bigger picture, you are likely to find yourself in the odd position of having to get out before you lose all of your money. There are some times when it is better to exit a trade before it gets too good or too bad, and this is one of them. It is not always easy to know when a trade is going to turn out well or badly (especially since there is a significant amount of money involved) – but if you are looking at an options (or stock) strategy and do not have a clear picture of what is going on, it is usually best to cut your losses and move on rather than try to exercise complete control over your investment.
Whether you are choosing to go long on a stock or short on a stock, you need to consider the amount of time you are willing to spend and the amount of money you are willing to risk. There are times when it is better to go against the grain and times when it is better to go with the flow. It is up to you to decide which one is the best choice for your needs.