Are You Afraid to Make Your First Options Trade?

Is this your situation?

You’ve been trading stocks
for a long time and believe you have a good understanding of how the market
works. Your stockbroker (or financial
advisor) tells you that options aren’t right for you and that only two of his
clients ever bought options – and both lost lots of money. You know that options are different, but you’ve done your homework
and feel ready.

You’ve taken the right steps,
by taking the time to understand options before putting your money at risk. You’ve learned a great deal and used a paper trading
account to get hands-on experience.

You feel that your broker lives under a rock and has no idea of how the
modern investment world works. After
all, the number of options traded has been increasing very rapidly for years.
Can so many people be wrong? But, you
wonder if options are only for hedge funds and other professionals.

You want to take the plunge,
but something is holding you back.  Perhaps it’s because you’ve seen dozens of web
sites promising fantastic profits if you take a seminar or buy an expensive
lesson plan. Those boastful websites make
you distrust everything related to options. 
I understand your


Here’s what I know is true

  •  Options are suitable
    for millions of individual investors like you.
  •  If you ignore the
    hype and use options conservatively, the chances of making money are better
    than your current method of owning stocks and/or mutual funds.
  •  It’s easy to make money when using
    conservative option strategies. It's just as easy to lose money if you get careless.  Thus, the difficult part is keeping that money.
  •  To succeed over
    the long term when using options, the most important skill to develop is the
    ability to manage risk. Sure, choosing
    decent strategies is important, but it’s secondary.


Your broker had only two
clients who bought options? That tells
you he doesn’t understand how options work and never bothered to learn. And
one of the major reasons his clients lost money is that he was unable to offer
them any guidance.

If you read and understood The
Rookie’s Guide to Options
, you know how much I stress the importance of
managing the risk of your investment portfolio. I share methods for managing risk for specific strategies and provide
all the information you need to get started on a successful option-trading

Options should be used to
reduce the risk of investing, and not as gambling tools. Begin with a simple strategy that involves
stock ownership because you already are
familiar with how that works. Choose
either covered call writing or collars as your initial option strategy. Or, if you paid attention to the careful
explanation of how synthetic equivalents work (Chapter 15), then you may prefer
to choose a strategy that is equivalent to the collar (selling a put spread or
buying a call spread).

No matter how you
begin, if it’s with a strategy you understand well and have practiced using in
your paper trading account, there’s no reason you shouldn’t do well. Not every trade is going to be a winner, but
the probability of success is on your side and you can easily outperform investors
who don’t take advantage of options.

You can make good money with
the six recommended strategies (and if you decide to adopt other methods, that should be okay), but no one is going to hand it to you. Begin slowly, gain experience, and you can make enough money to make learning about options well worth your time.


One Response to Are You Afraid to Make Your First Options Trade?

  1. jwsaunders 07/22/2008 at 10:42 PM #

    I just set up a paper account and tried to enter an iron condor on RUT but iron condors appear to be backwards, i.e. the graphs for selling an iron condor in your book is the graph the online broker has for buying an iron condor. For example, buying a Sept08 iron condor comes up as
    Buy 610 put
    Sell 630 put
    Sell 780 call
    Buy 800 call
    What, if anything, am I missing??
    You are not missing anything. When you SELL the call spread and SELL the put spread, you are BUYING the iron condor (IC).
    It’s easy to get the terminology backwards and fall into the trap of thinking that selling the spreads means selling the IC.
    You and the broker are correct. I made that error when writing the book. I apologize. thanks for the question.