Why Am I Writing This Blog?

When people ask what I do for
a living, I tell them I’m an author, trader, and educator. When I continue, mentioning that my field is
showing individual investors how to use stock options safely and profitably, the
questioner loses interest. Why is
that? Say the word ‘options’ and people
close their ears. I am never asked to
‘tell me more.’  I’m disappointed to find
so many closed minds on this topic. 

The truth is that options
were designed as instruments to hedge, or reduce the risk of owning another
investment. Options can be used as a
type of insurance policy to prevent a financial disaster, but the general
public is unaware of that. They all
think options are just too risky.

Many people, including
financial professionals, have the misconception that options are ‘dangerous’
and are used only by speculators. I’m
using this blog, my website, and the books and magazine articles I’ve
written to explain just how the individual investor can begin to use options.
With reduced risk. With enhanced
earnings. The hurdle I must jump over is
getting people interested in reading or hearing what I have to say. Shouldn’t any investor find those two
attributes to be very attractive: reduced risk coupled with more likely profits? But, when the word ‘options’ is included in
the same sentence, that’s the end of the conversation.

It’s true that too many
novices jump into the world of options by gambling. They take positions with little chance of
success. When they lose their money,
they blame ‘options.’ People don’t get
behind the wheel of a car without knowing the traffic rules or how to apply the
brakes. But, when it comes to options,
apparently there’s no time to understand first
and trade later.

I want to help end this
madness. This very versatile investment
tool can help investors succeed, and it’s my goal to help them along that
path. This blog is part of that
effort. 

Comments welcome.

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One Response to Why Am I Writing This Blog?

  1. Michael S. 07/19/2008 at 11:09 AM #

    Hi Mark, thanks for a great blog. I am finding this site extremely useful and check on it frequently during the day. I have a simple question:
    Let’s talk about strike prices that are higher than the asking price. Do you have to consider the premium when it’s time to purchase an option where the price is not the market price? Are there usually enough options for sale to pick and choose an option with a variety of prices?
    Also, do Options necessarily follow the market? Thanks again for a great service.
    REPLY
    Let’s begin with the easiest question first:
    1) Yes. There are more than enough options available, and you can buy or sell any option that is listed for trading. But, there is one exception: Sometimes an option is so worthless that no one is willing to pay anything to buy it.
    When you see a bid price and an ask price, the market makers are obligated to honor that quote for a specified minimum number of contracts. That minimum varies, but as a rookie options trader that is no concern of yours. You will probably begin by trading one to five option contracts per trade. Hedge funds may want to buy or sell many thousands of contracts, and sometimes those large orders are difficult to fill when trading the options of some stocks. It’s never a problem in the actively traded indexes where large orders are routine.
    2) The following is true for all option trades, regardless of the strike price: The premium is the price at which the option trades. It’s the price you pay when buying or the price you receive when selling. Yes, you must pay attention to the premium. You should not be trading willy nilly, accepting any old price just to make the trade. Advice: Never use a market order when trading options, unless you are desperate to make the trade immediately. Use limit orders.
    3) I don’t know what this means: “strike prices that are higher than the asking price.” I assume you are referring to out of the money (OTM) options in which the strike price is above the stock price. If that is correct: Yes, you must worry about the premium and Yes there are plenty of options for you to trade.
    4) Options usually follow the market, but there are plenty of exceptions. The first is time. If too much time passes, then the value of the option decays and and when the market moves, the option may not move enough to provide a profit. The second is the option premium. At various times option prices are ‘pumped’ and investors who buy options at that time find that the stock moves their way, but the option price declines! That’s due to the fact that the air comes out of the option price and the option premium returns to a more normal level. See the blog (July 14,2008): “Message for Rookies…”
    Mark