I promote option trading. I know that conservative option strategies can help millions of investors earn more money, more consistently, and with less risk, when compared with buying and holding a diversified stock portfolio.
I know that options are risk-reducing investment tools. But only when used intelligently. One purpose of the Options for Rookies blog is to encourage you to learn how options work – enabling you to discover whether options are suitable for you, your investment goals, and most importantly, for your personality.
Today it's necessary to discuss the negatives associated with option trading. When used improperly by people who have not bothered to understand the risks and rewards that come with with using options, option trading can quickly decimate your investment account.
Far too many individual investors begin trading options before learning how to use them properly. It's not that different from learning to drive a car. It looks easy. It seems that you don't need instructions. If given an opportunity many would climb into a car believing they can learn as they go. Some do manage to learn via that path. But it's foolish. Not only is that driver endangering him/herself and the car, but the lives and property of others are jeopardized by that uneducated, novice driver.
If you jump into option trading, you endanger yourself and your bankroll. The good news is that the lives of others aren't being jeopardized. But that's not good enough. If you believe that buying and selling options is a simple game and that you can learn all you need to know as you gain experience – then you are misinformed.
I frequently write about using options to improve your financial life. But today it's time for a warning – time to inform everyone (who does not already know) that
The options game is not 'free money'
There is much to learn
Risk can be deceptively large
In short, I hope that helping you understand what not to do, you will pay serious attention to learning how to use options before using real money.
Option trading is not a game. It's a serious business that requires an understanding of the rules of the game. BEFORE you begin trading.
Here's a partial list of things to avoid:
- Don't use options for gambling. Don't buy inexpensive, low-delta options looking for a big score (those big wins are rare)
- Don't ignore risk when mesmerized by potential profits (It's easy to lose 100% of your investment when buying options. Selling naked options can quickly bankrupt your account)
- Don't depend on the market doing what you predict it will do (few can consistently predict market direction)
- Don't blindly follow trade suggestions (their trades are most likely unsuitable for you)
- Don't pay thousands of dollars for educational seminars (better information is available at little or no cost)
- Don't depend on hope (hope is not a strategy)
With the obvious bias of the author, I recommend The Rookie's Guide to Options as the best options primer available. The amazon.com reviews are typical of e-mails I receive from satisfied readers. A sampler version is available at no cost.