Everyone believes that buying options is the riskiest thing you can do in the stock market. While they are risky in a sense that you can lose money they are no more risky then buying stocks. The main reasons people think others are.
1. Short Term
People look as short term as risky. I have heard more than 1 person say that you cannot predict what will happen in the market in a less than 5 year period. I am not sure where this number comes from, but you can make money by being a short term trader.
Stocks movements can be predicted to some degree of accuracy in a short time frame just like they can in a longer time frame.
2. Huge Possible Returns
Options can potentially give you hundreds of percentage returns in the stock market. People associate this with greater risk. That is not always the case. Options are a great tool which allows investors to make the same return they would have if they traded the stock only risking a lower dollar amount.
You could buy 100 shares of a stock for $50 a share or you can control the same 100 shares of the stock for $4 a share. This way you can profit from the same move, but have a smaller loss if things turn against you. The problem is when people over leverage and try to control 10 times as many shares as they would have been able to before.
3. Potential Loss
One argument is that you risk 100% of your position when you buy an option. That is true, but the risk can be managed pretty easily. You can lower your potential risk by doing things such as buying less and using stop orders.
4. Don’t Follow stock directly
Options do not move on a one to one basis with a stock. There are many other factors such as volatility and time value that affect the options price. You can look at things such as the option Greeks to help you get a better understanding of this.
5. You can’t Just Buy as hold
If you try to buy and hold options you could be in for a nasty surprise. In order to use options correctly you really need to create a plan for trading and stick to it.
6. Options Aren’t For Everyone
Options really are not for everyone. Some people may be better
off not trading options at all and that is ok.
For more on stock option trading visit http://www.stocks-simplified.com/stock_options.html
For more on Option Greeks visit http://www.stocks-simplified.com/option-greeks.html
When I was young I wanted to learn how to trade the stock market. So I traveled around the country listening to professional traders talk about how they are making money in the market. Now I understand how easy it is to make money in the stock market and started a site stocks-simplified.com to help others learn.