I recently had the opportunity to visit with my godson who flew in from Calgary. He is a follower of my blog and shares my posts on his LinkedIn account. He believes that I should write about option trading. I argued that very few viewers on word press would be interested in reading about options. Why write about a complex topic like options if no one will read it.
I been trading options for over 25 years ago. During those years, I have found only one other person who shares the same passion. Even the financial advisors from my former office didn’t fully understand options. In fact, the reason we started our investment club back in 2001 was to get more practical experience with options. It took me three years’ worth of quarterly meetings to get my investment club members up to speed with my option strategies.
Keep in mind, the financial industry measures risk by potential loss and options are at the highest level in the risk pyramid. Unlike a stock, an option has an expiry date which means you can potential lose 100% of your investment. However, the reward could easily be 100% to as high as 500% return on investment.
For years, I have made the argument that percent risk should be balanced off with the amount of dollars that you have invested. For example: Buying 500 Microsoft shares for $25,000 could generate a potential dollar lost greater than buying 5 call options for only $1,500. A 15% correction in the price Microsoft stock would cause a loss of $3,700 and the option would expire worthless (-$1,500).
The option loss is immediate! One could argue that you don’t have to sell the stock for a loss, you could continue to hold hoping for a recovery in price. I believe that a buy and hope investment strategy isn’t very successful over the long-term.
Another reason why I don’t write about options is the risk management department within the financial industry will not approve the average investor for option trading. An investor would be lucky to get basic level one option trading. It only allows an investor to buy a call or put and the writing of a covered call position. Even with my extensive option experience, my accounts have restrictions on the types of option trades that I am allowed. I have even tried moving my option accounts to other discount brokers but they all fall short.
Here are some option strategies that are difficult to get approved:
- Uncovered Call or Put
- Bull Call Spread
- Bear Put Spread
- Protective Collar
- Long Straddle
- Long Strangle
- Butterfly Spread
- Iron Condor
- Iron Butterfly
Knowing what they are is only half the battle, knowing how & when to use them is the other half.
One trader recently sold 17,000 puts on Facebook betting that earnings would beat and the options would expired worthless. He only made $1,700,000 in just over a month.