Buyer Beware: Trading Options Will Give You a Scare!

Caution, careful

Do you want to make money in stocks?

Overall, it’s a wise idea, but there’s one investing strategy you’ll want to steer clear of: options trading.

Options can bring in big profits if everything works out the way you want it to, but on the flip side, options can also deplete your account balance to nothing. Many influencers push options trading as a wise investment strategy, but the truth is that it’s not. The very definition of “high risk, high (potential) return” means it is best left to the professionals.

Why options trading is risky

The reason options trading is risky is because of the “either/or” nature of the payoff. The stock or other asset beneath an option has to hit its strike price before it will pay you anything. If it doesn’t hit that price before expiration, then your entire investment literally goes to $0. That might sound severe, but it’s just the way options work. If you profit on a trade you’ll typically get a much better return than you would by owning the same stock outright, but if you lose money on a trade, you lose everything.

Now, you might be thinking “Sure, but aren’t all investments a matter of balancing risk and reward?” Technically, yes, but with options, it’s a complete coin toss whether you earn any return at all or go broke. This is quite different from owning a stock portfolio whose shares decline in price a little bit from time to time. Unless you are a professional, you should stay away from options trading.

What you can do instead

If you’re concerned about losing money trading options but still want to invest, you can consider buying stocks and index funds. Stocks sometimes deliver excellent returns, while index funds typically deliver so-so returns. A diversified portfolio of stocks and funds should deliver good returns over time.

Consider Fortis (TSX:FTS) stock, for example. It is a Canadian utility stock that has delivered steady and consistent returns over the years. Its stock has delivered a total return of 11.8% per year over the last five years, which is much better than the TSX as a whole.

What makes Fortis such a dependable dividend stock?

First, it’s a utility, and utilities as a whole typically enjoy stable revenue. Heat and light are basic life essentials; people wouldn’t cut them out of their budgets. So, utilities have a fairly steady stream of revenue coming in.

Second, Fortis has invested heavily in growth. Over the last 50 years, it has purchased utilities in Canada, the U.S., and the Caribbean. It is currently undergoing a five-year, $5 billion capital expenditure program that will increase its rate base. The company hasn’t been content to sit on its laurels. As a result, it has rewarded its long-time shareholders.

Foolish takeaway

Fortis is one of Canada’s best-performing dividend stocks. It has a high yield, and it aims to keep raising the dividend payout over the next five years. Those who invest in it today may well be rewarded over the long term. Just remember to buy Fortis shares, not Fortis options!

The post Buyer Beware: Trading Options Will Give You a Scare! appeared first on The Motley Fool Canada.

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Fool contributor Andrew Button has no position in any of the stocks mentioned. The Motley Fool recommends Fortis. The Motley Fool has a disclosure policy.