A Canadian on Wall Street

In this volatile market, where making outsized gains is fairly unlikely, I’ve started to appreciate more the features of options. In addition to the usual pro of leverage, there’s a natural stop-loss built in to any contract (i.e. the total value of the contracts and commission is the maximum you can lose) that becomes more attractive in a market where it’s unlikely that major advances will be made. As well, what is usually considered a disadvantage of options — their definite expiration — is in fact an advantage in the current markets: it forces you to think about specific events that might occur and to buy appropriate contracts to, hopefully, profit from these events, and removes the hazy, undefined expectations that have no time frame and can cause you to stay in positions that you have no definite reason to. (On a side note, prediction markets are more closely aligned with options than futures in my mind due to their loss limitation features; I think using options in the way you might use the prediction market contracts, i.e. with at least some awareness of probabilities, is a fairly good method — has someone explored this?)

That said, obviously owning a stock has its own advantages — possibly dividends, more liquidity and if your cost basis is low enough and the business is strong over time, the time frame to pick and choose when you want to sell — but for the time being I’ve preferred option trades.