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?

Three Winning Bear Market Option Trading Strategies Revealed

admin — Tue, 24 Nov 2009 18:54:44 +0000

Most people lose money in a bear market. Do you remember the tech bubble and recession in 2000-2002? This article will discuss three option trading strategies that can make you big profits in a bear market or recession.

Option Strategy No. 1 – Buying Put Options

It is fairly easy to purchase put options. This option trading strategy can even be used in an IRA account as long as you have been authorized by your broker. You desire to select a stock, which you feel has a good chance of going down in price. Your risk will be limited to the cost of the put option. For example, stock XYZ is currently trading at $50 per share and you buy a put option on XYZ with an expiration date of two month later with a strike price of $50. If the stock drops from $50 to $40, your put option would be worth $10 per share.

Option Trading Strategy No. 2 – Buying Bear Put Spread

Buying a put spread is a little more complicated than just buying a put option but gives you the benefit of reducing your cost but caps your profit. A put spread is characterized by the trading of two same month expiration put options, buying one at a given strike price and selling the other put option at a strike price lower than the purchased put option. You want to pick a stock that you believe will be falling in value. Your risk will be limited to the cost of the put spread. As an example, if we purchase the put option as listed above but also sold a put option with a strike price of $45. In this example, should the stock plunge to $40, you would profit $5 per share ($50 strike price – $45 strike price). And while you are making less per share, your savings comes in the fact that the cost of buying the put option outright would be much higher than the initial cost for the bear put spread.

Option Trading Strategy No. 3 – Married Put

Risk can be minimized by utilizing a married put, which is a hedging strategy. This strategy consists of purchasing a stock that you believe will appreciate in value and buying a put option at the same time to minimize any losses due to adverse market movement. You might have heard the saying that there is always a bull market going on somewhere. In order to benefit from this strategy find out what business sectors and securities go against the grain and appreciate in a bear market. Next you buy the stocks you chose and protect your investment by buying a put option to limit your losses if the stock goes south.

In conclusion, you can still make big profits in bear markets by looking for stocks that you think are going to fall in price and buying a put option or a bear put spread. Alternatively, you could buy a married put on a stock in a sector you believe is going to appreciate, thus minimizing your risk. In addition to buying options on stocks, you can also buy put options on exchange traded funds or index options. Exchange traded funds let you invest in global markets, commodities and even currencies. It is possible to receive a large profit in a bear market. However, it is vital to comprehend the details of the option strategies, choose the correct stock, exchange traded fund or index option, and make use of a proven tactic and begin.

Disclaimer: This article should not be used as financial advice; it is only for informational purposes. Be sure to contact your financial advisor prior to making any decisions on investing.

Hedging Options » Put Option

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

Three Winning Bear Market Option Trading Strategies Revealed