I've had the pleasure of meeting and enjoying a beer with Ron Ianieri from OptionUniversity.com. For those of you who've had the opportunity of learning options from him, you know what I mean when I say he's awesome! He's experience, poised, and his knowledge from REAL LIFE trading is outstanding.
Well Ron (the linebacker looking guy to the right --->) has written this article for us today talking about "them", and I think you'll like it!
Please enjoy the article below, comment with your thoughts, and check out Ron's new online video!
Are you one of the “misinformed? Are you losing the tremendous opportunities that using stock options can offer? No, options are not one of the more risky investments. “Oh, yea” you say sarcastically. “That’s why my broker looks down at the floor as he hands me a risk disclaimer statement which warns the reckless investor about the dangers of trading stock options”, you say. Well, I say to you, dear reader that most investors don’t want to take the time to learn about options-one of the most versatile in-vestment tools available. Too many investors go into trading stock options without adequate education and take the fall. They blame it on the vehicle….not the driver. Like anything, lack of knoweledge can cause problems and that holds in spades for options.
Consider the fact that the risk of purchasing an option is limited to the premium paid. Owning stocks, however, usually have a much larger ex-posure to risk.
For example, if you purchase 100 shares of Home depot (HD) you might pay around $ 3400. To purchase an option contract for the rights of 100 shares of HD for a specific time period, you might pay about $ 200. If properly set up, the most you could lose on the option contract (100 shares) would be the $200 premium (premium is the same as the option cost for 100 shares). On the other hand, it’s possible for you to lose all-or certainly a large percentage of your $ 3400 on the purchase of the 100 shares of HD. A sudden bankruptcy or some unforeseen event can make this unlikely event a reality; it has happened before and will happen again. The risk exists. Not so for stock options; the maximum risk is the option contract premium which is a fraction of the cost of buying the underlying stock. It’s a fact.
Options and other derivatives probably get a bad rap because investors, option traders and speculators focus on the leveraged reward options offer but lack the knowledge to control the risk side of the option equation. Fortunately, it’s just a matter of education.
Stock Option Basics
There are many ways to take advantage of the tremendous flexibility of options. Some of the most common strategies employing options are: 1) To hedge an existing long or short position in the underlying equity (like purchasing insurance). 2) To leverage a position either short or long; 3) to make a profit by selling the rights to the underlying stock. With options, a trader can make a profit when the market is going up, down or flat. But for the most part, options are high leverage-controlled risk investments with the potential for high returns.
Options can be an effective way to leverage investment assets that can reduce shorter term risk while freeing up assets to purchase for the longer term. For example, an individual investor could use 10% of investment funds allocated for equities to purchase volatile, higher risk-reward, options (volatility is good for trading options) and use the 90% to purchase positions in less volatile, long term positions.
As trading options is more complex than trading stocks, bonds, or mutual funds, many investors don’t want to spend the time to become better educated on the mechanics and benefits of trading options. But as returns on most traditional investment products become anemic, investors are starting to look at options as a way to boost profits with the least risk. Options offer a very attractive way to accomplish this goal.
Our modern times require more education for those who want to participate in the benefits that a more complex society can offer. Many have been forced to become computer literate and found out they could make the transition with little or no difficulty. What might at first seem to be daunting can turn out to be easy and interesting. At no time in history can it be more app- ropriate to say that “knowledge is power”, and learning to trade options is an excellent example.
Please take time and watch my free online options training video!