Options Are Too Risky – Only Crazy People Invest in Stock Options

admin — Tue, 29 Dec 2009 06:57:46 +0000

Who decided that options are too risky for the everyday investor? More importantly can somebody please explain why options are too risky? After years of research I have finally come to understand that there are 3 types of people that can be held responsible for the Myth that options are too risky. Who?1. Financial Planners
2. Stock Brokers
3. Taxi Drivers
Is it possible for the uneducated investor to lose lots of money if they trade options? Yes of course they can, first of all the uneducated investor can lose tons of money using any trading instrument and secondly options are highly leveraged so if used incorrectly then they will increase your losses. So if this is the case then why an I saying that trading stock options isn’t risky?
The first thing that you must realize about stock options is that they were actually invested to reduce or manage risk. The whole idea of buying a put option to hedge you stocks is basically another form of insurance. When looking at your portfolio risk management options buying puts to ‘insure’ your stocks is one of the most conservative investment strategies that you can implement.
On the other hand selling call options on stocks that you already own (covered calls) is another incredibly conservative stock market strategy. This strategy actually increases your downside protection, so when used correctly the myth that options are too risky is simply not true. Of course if you start writing naked calls or naked puts then your risk levels are going to seriously increase but when used correctly options are an amazing risk reduction tool.
Let’s have a look at why financial planners, Stock Brokers, and Taxi drivers are giving Options such a bad name.Financial Planners: If you go to your financial planner and say that you would like to include options in your trading strategies then they will almost definitely tell you that it is a very bad and risky idea. Why? Simply because 99% of financial planners wouldn’t have a clue how to use them. I recently spoke to a financial advisor who admitted that her entire financial planning degree only had one chapter on options and it was completely theoretical information. In their entire course there was not one bit of practical information about how to use options. So considering that most financial planners don’t actually know what stock options are let alone how to use them is it any wonder that their typical response is negative. Remember human’s beings fear change and looking stupid.Stock Brokers: Surely Stock brokers don’t think that options are too risky? Aren’t they meant to be professional stock market investors? Unfortunately most stock brokers are exactly that ‘STOCK’ brokers not ‘OPTION’ brokers. To become a legal options broker there are additional courses that you need to complete so most stock brokers aren’t actually allowed to give you ‘option’ advice. Put yourself in their shoes for a minute – if a client came to you and said “What do you think of buying Options” then you are faced with two choices
1.Tell them that is a great idea but unfortunately you will need to take all of your money out of our accounts and go to another broker who is legally allowed to trade options, Good Luck with your investing.
2.Or you could tell them that options are too risky and you really should just stick to managed funds and stocks.
So what answer would you choose?Taxi Drivers: Obviously this is a little bit of a joke but the point I am trying to make is that everybody seems to think that trading stock options is too risky. It is extremely important to remember to make up your own mind about investment strategies, whatever you do don’t take advice from a taxi driver about wealth creation.
“the most expensive advice you will ever get is free from poor people” Kurek Ashley
So are Options too risky? If used incorrectly yes but perhaps the question you should ask yourself first is ‘what are stock options’? Before you dismiss something as being too risky or scary make sure you try to understand what it actually is and how it works. There are plenty of free resources on the internet so do some research and make up your own mind about stock options. The last thing you want to do is ignore something just because that is what everybody else thinks. After all are these people achieving the results you are after or are they still driving taxis?

Covered Calls – The Easy Way To Make Money Trading Options?

admin — Sun, 20 Dec 2009 19:47:55 +0000

“Are you, nuts?! You want me to risk part of my savings trading options? This whole covered calls idea sounds like just another one of those crazy options strategies that sound great, but don’t deliver in the end.”

My pal was a normally a mild-mannered sort – very reflective, always weighing the consequences rationally before acting. In short, a logical thinker.

Imagine my dismay when that one phrase, “trading options”, triggered this unprecedented tirade. You’d think I’d insulted his family or something even worse.

After a few seconds had passed, I realized the reason for my friend’s outburst. He, like so many other investors, had only lost money trading options.

Why? Because he’d never discovered the number one option trading secret: 3 out of 4 options expire worthless. You read that correctly, when you trade options as a buyer, you have a 25% chance of making money, and a 75% chance of losing money.

This is why professional traders and investors favor the option strategy of selling options, rather than buying them, in hopes that the trade will go their way.

“Wait a minute. How can all of those options just expire worthless? I’ve seen ads for 100’s of option strategies and trading systems on the internet. They can’t all be losing money.”

I had to smirk. Now I really had him thinking. He knew that I hadn’t yet told him the big “secret behind the secret”, but he couldn’t quite put his finger on it.

“I have one word for you, my doubting friend”, I said,…”Time”. “When you become an option seller, you have time working FOR you, instead of against you. The reason is simple – as puts and calls get closer and closer to their expiration date, they lose their time value, due to “time decay”, or theta, the Greek letter that option traders use to denote the % of change in time value of an option.”

This is true of any option, no matter if you’re buying or selling call options or put options, or using a covered call strategy. It’s one of the big secrets of options investing that doesn’t get written about too often.

Because of the power of time decay, you can actually guess wrong about the direction of the market, or a stock, and you’ll still make money selling a call option or put option, as opposed to the buyers on the other side of the trade, who not only have to guess the stock’s future price movement correctly, but must do it BEFORE the option expiration date.

This helps to explain why even conservative investors use the covered call strategy, which is widely considered one of the most conservative option trading strategies around.

To sell covered calls, you must own at least 100 shares of the underlying equity, since each call contract corresponds to 100 shares of the underlying stock.

This is a tool you can use to hedge your portfolio, and lower your risk, by receiving “call premium” money, which lowers your break-even cost basis.

Selling covered calls is a short-to-mid-term option strategy you can use to double and triple your yields on new stock purchases, and/or to earn more income from your existing portfolio.

Hedging Options » call option

Options Are Too Risky – Only Crazy People Invest in Stock Options

Covered Calls – The Easy Way To Make Money Trading Options?