Turn options risks into rewards
Today I want to discuss whether options are too risky for usage by the average investor. There is a very simple reason why many investors feel that options are too risky an investment to trade; it is because most persons who buy options lose money.
The Chicago Board of Exchange has reported that as many as 90% of all persons buying options lose money. It would seem accordingly that options are a losing form of investment and therefore should be avoided.
In actuality, options can be used in many ways, some risky and some quite conservative. The problem for most investors is not that options are risky by nature, but that the average investor often misuses options in a way that is statistically likely to lose money.
The most common strategy used by investors with options is to buy either call or put options (we discussed call and put options in prior postings.)
The purchaser of a call option is betting that the security underlying the call option will rise in value, and therefore the holder of the call option will profit. The purchaser of a put option is betting that the security underlying the put option will fall in value, and accordingly the holder of the put option will profit.
While purchasing call and put options can be profitable, they are actually losing investments 90% of the time. The primary reason why so many of these option investments fail is because of the time depreciation element of options. This means that options lose value simply with the passage of time.
Because of the time depreciation element of the options, the purchaser of a call or put option can be correct about the movements of the underlying security to the option and still lose money.
It is quite simple to turn the time depreciation element of options into ones favor but most investors fail to do so because they are not willing to give up potential gain to offset risk.
In sum, the basic notion that options are too risky an investment is a fallacy. Options trading is a zero sum game which means for every loser, there is also a winner. If 90% of all persons buying options lose money, there must be a reverse strategy that is being used by a minority of traders to take money away from the majority of traders, and there is.
In order to offset the likelihood of losing money with options due to the time depreciation of options, it is necessary to set up one’s trades properly.
In Las Vegas, the house wins because it has the odds of each betting game in its favor. Likewise with options, it is possible to be consistently profitable if the trader turns the probable outcome of each trade to his favor by letting the time depreciation element of the options work in his favor. We will be discussing the proper way to set up option trades in the next article of this series.
I will be giving an online options seminar today at 11 a.m. EST., and every other Thursday at 11 a.m., to discuss more fully the proper approach for using trading options.
If you wish to participate in undertaking an options recommendation, you may access the free trial for PatientTrader.com through the TradingMarkets.com website.
Charles Sachs PatientTrader.com options@adelphia.net
Charles Sachs has utilized S&P 100 for the past 14 years, both as a trader and an advisor. He uses 24 proprietary indicators in order to structure options strategies which can generate gains whether the market moves up, down or sideways.