Options can provide a few benefits over trading the underlying securities outright. 1. They can have less risk. This is true for those buying call (long) or put (short) options, as one’s loss potential is equal to the premium paid to own the option on the set of underlying securities. This can be particularly useful for shorting stocks. Because stock markets generally go up over time and most of a stock’s movement relates to the broader trend, shorting tends to be much harder than picking longs. Even with a robust short thesis, events such a buyout announcement can shatter it overnight. Buying put options can protect oneself from this by capping risk. 2. Options can provide a cost-efficient way to invest in securities of interest. Owning options gives one the right, but not the obligation, to own the underlying in the future (should it land in-the-money). To do this, options generally cost around 5%-10% of the actual price of the underlying for an expiration one year in the future. This provides implicit leverage, given the lack of need to commit full amounts of capital to owning the underlying asset. 3. They can provide strategic flexibility. Instead of merely buying and selling securities, with straightforward profit and loss scenarios, options can cap risk and strategies can be structured in such a way, for example, as to profit from price staying range-bound or if it ventures in either direction by a certain amount. 4. Options can provide higher returns potential. When one makes similar levels of return with a lower cash outlay, this is effectively a higher return on your money. On the same token, if options don’t land in the money, you effectively lose your entire investment (the premium that you initially paid). Also, with options’ time decay element, you effectively need the price of the underlying to move an extra bit in your favor just to breakeven. For example, for SPX options based on the current price of the index (currently just above 2,700), if one were to buy the March 2019 expiration, the index would have to increase to 2,900 just to breakeven, or about a 7% gain. WhoTrades Marketplace Options Portfolio Some traders utilize options on the WhoTrades Marketplace. Since opening the account back in April 2017, this trader has obtained a yield of 77% – with just a 6.6% drawdown – by predominantly trading options. (Source: Trader's Portfolio Page) Approximately 30% of the portfolio is in stock of US Global Investors (GROW), an asset management company. The remainder is comprised of options, a mix of call options on four and put options on six. It’s not totally clear whether the put options are of the buy or sell variety, though appear to be the former. If the put options are bought, then this effectively makes these short positions on particular stocks. If the put options are sold (or “written”), then it indicates that the trader is looking to collect premium. Sometimes traders will sell put options if they have interest in buying a stock should it get down to a cheaper price but still would like to get paid while waiting. It should be noted that selling options is a risky strategy as one’s downside is theoretically unlimited. While traders like the idea of getting paid to wait on an idea, you only get compensated a small amount for taking on an inordinate amount of potential risk. When selling/writing options, one should always have the cash on hand to be able to cover them if necessary. Many traders have been blown out of the game entirely due to instances of selling options that massively backfired. (A recent example was the “short volatility” trade that blew up in early February and was popular even among many institutional investors trying to juice yields.) However, based on the price of the underlying stock relative to the strike price of the options, it appears that the trader is buying put options on these. (Namely, the stock price is under the strike price, suggesting a short. The exception is the 1,000 strike on AMZN, but that’s listed as being just 0.01% of the portfolio.) 57% of the portfolio is long through either the position in GROW or via call options, and 43% of it is wrapped up in put options. However, two of the holdings are in a “short Treasuries” ETF (TBF) at different expiries, effectively making these call options short positions. If the put options are indeed of the buy variety, that would make the portfolio effectively 36% long and 64% short. Though on the basis of the trader’s bullishness on economic growth (short positions in US Treasuries, a safe asset, suggest bullishness on growth), the money wrapped up in the call options on the short Treasuries fund would render it 57% “economic growth favorable” and 43% “economic growth unfavorable.” Current longs (through call options) include: Short 20+ Year US Treasuries (TBF) (20.9% of portfolio) Coca Cola (KO) (4.7%) Hecla Mining (HL) (1.9%) Current shorts (through put options) include: Hormel Foods (HRL) (12.2%) TJX Companies (TJX) (8.7%) Gap Inc (GPS) (8.3%) Hostess Brands (TWNK) (6.9%) Allegheny Technology (ATI) (6.8%) Amazon (AMZN) (<0.1%) Conclusion Options trading can provide certain benefits over standard securities trading. Options can have less risk (depending on how they’re used), be more cost-efficient, provide strategic flexibility, and leverage returns. Though, at the same time, there are also certain disadvantages to options – e.g., can lose 100% of your investment, won’t collect any applicable dividends from owning the underlying securities outright, and leverage can impact performance in both directions. This particular trader on the WhoTrades Marketplace uses them to hedge in both directions and to take short positions on stocks believed to potentially depreciate and/or underperform the market. This type of strategy is similar to long/short equity market-neutral, where a trader will choose to separate the companies expected to outperform the market versus the companies expected to underperform, and then use leverage to boost returns on any favorable spread achieved. (Though it’s uncertain what type of leverage this trader uses, if any.) Consider following this trader or thousands of others on the Marketplace to check out strategies of interest, track their progress over time, and to generate trade ideas for your own portfolio.