Saul,
I am getting marketing emails from the MF about learning to trade options. I didn’t see anything in your knowledge base about your views on this.
It would seem writing puts on your highest conviction stocks (SWKS & SKX) would be a good way of adding additional income to ones portfolio…??
I don’t know enough to understand the danger of options so would be interested to hear your wisdom and others from this board.
Justin
Justinr,
From the Knowledgebase:
I don’t invest in options. They are too much distraction for too little gain. Also they are a “zero-sum game”. That means if you sell an option, whatever you gain, the person who bought the option loses. Exactly the same amount. And vice versa. And you are competing against professionals!
If you’re a member of Stock Advisor I know there’s a pretty robust options board on the service with lots of participation. I also know the Pros service exercises a lot of options. Beyond that, I really can’t help you much. Hope this helps.
Matt
MasterCard (MA) Ticker Guide
See all my holdings at http://my.fool.com/profile/CMFCochrane/info.aspx
Options are best used as a complement to a stock portfolio. In order to pair an equity and options strategy one must have a pretty thorough understanding of the equity and which type of options strategy aligns with your view of the security and what you want to do.
For instance, think FB is a good long term bet? You can sell a put option a little below the current price to possibly own additional shares at a cost basis equal to the option’s strike price minus the premium you received from selling the put.
Think you’d like to trim your MCD holding? Sell a call at the money or perhaps a bit above the current price and if MCD is at or above the strike price your shares will probably be called away and you will receive whatever the strike price was plus the call premium you already received.
I am a member of Pro and Options, and I find they do well together.
Bob
Be careful with options. There an insanely wide range of risk to them.
Selling naked options are basically nuclear.
If you get in to buying a lot of puts and calls with no underlying that’s a recipe for disaster.
I’ve heard all sorts of horror stories my own included and Saul has one about futures.
Sure if you have the discipline to only sell covered calls… And the type of situation bob describes below…
I lost two entire accounts and only because I made a s**tload of money trading aapl options in 2012. Right before it tanked
I am getting marketing emails from the MF about learning to trade options. I didn’t see anything in your knowledge base about your views on this.
Hi Justin, I don’t trade options. I know that there are others who do but it’s not for me. Here are a couple of quotes from the Knowledgebase about them:
## Basic Rules of the Board
Yes, there are some off-topic subjects that don’t belong on the board.
What comes to mind off the top of my hat are subjects like politics, like extended discussions of technical analysis, or option trading…
I don’t invest in options. They are too much distraction for too little gain. Also they are a “zero-sum game”. That means if you sell an option, whatever you gain, the person who bought the option loses. Exactly the same amount. And vice versa. And you are competing against professionals!
(Justin, note that tis is different than the stock market, which is not at all a zero sum game. When a stock goes up everyone invested in it makes money (except a few poor souls who are short it)).
Hope this helps.
Saul
And you are competing against professionals!
With this attitude, we might as well turn our assets over to fund managers or bury them in the yard.
Just as in sports, “professional” is a descriptive applied to those who are paid for what they do. It doesn’t confer skill or infallibility.
Everyone has a learning curve. Scaring folks away with “profesional” FUD is inappropriate.
Happy Easter!
Justin, let me add one more suggestion regarding options. Several years ago I subscribed to TMF options services to check it out. It was very educational and I learned quite a bit, enough to realize it was not for me. It seemed like I would have to keep a pretty close eye on my trades which didn’t work well with professional and family commitments. I cancelled my subscription and got my money refunded. I suggest you try the service out. You get a month to decide and you can get educated about options.
Just my 2 cents.
David
Options can be used for just about any purpose in a portfolio - they can be used for aggressive bullish bets, hedging existing positions, or protecting against volatility.
That said, here is the most important piece of information one should know before dipping a toe into these waters: If you have not built an understanding of how option pricing works, you have absolutely no business buying or selling a single options contract.
This is not meant to discourage anyone from using options, I believe them to be a very valuable tool if used properly. But as others have said, if used without proper understanding they can be devastating. I suggest if one wants to use options, first commit the time needed to understand all of the factors that go into an option contract price.
The post above referencing ‘betting against professionals’ is 100% correct in that somebody else is taking the other side of your contract, and you can bet it isn’t a retail investor. When you buy or sell a stock the dynamics are different. Your counter-party on an options contract understands exactly what the fair market price is for that contract, so you should too.
Thanks everyone for the advice. As usual extremely helpful!
Justin
One more… (Sorry Saul)
The nuclear danger MusiCali (sp?) refers to above is definitely in play when you BUY options; far less so when selling puts or covered calls. Just be sure to NEVER:
Sell a put on a company you wouldn’t be happy to own at the strike price
OR
Sell a covered call on a company you wouldn’t be happy to sell at the strike price.
There are many other strategies, but you don’t have to learn more than one or two to juice your port a bit.
With the MFO subscription, you get access to the Options U learning center and pretty good hand-holding right along. I’ve been finding that education alone is worth the ticket price.
Full disclosure: I find the education I’m getting here on this board to be far greater, and directly addresses the first step for options: KNOW THE UNDERLYING BUSINESS.
Foolshly,
Jackson