I have often been asked whether option trading is a good idea.
The answer is fairly simple, I believe. I tell those who ask it depends on two things: you and what you hope to accomplish. I will elaborate a little on each point, but there are certain things option trading can and cannot do and you need to understand this before trading options. That being said, options can lower an investor’s or trader’s risk and produce profits and losses as well.
The ‘You’ Part
As humans, we are not particularly designed to be traders. The emotional aspect of trading is huge. Many traders and investors are not prepared for it, and most do not overcome it. I hired a trading psychologist myself, and it was the best money I ever spent. So aside from what options can give and not give you, one needs to ask oneself, “Can I handle trading?” If the answer is yes, what do you hope to accomplish?
Options cannot perform miracles, and you definitely can lose money trading them. But options allow you to hedge, use leverage and generate income. Hedging essentially reduces risk. Options can protect individual trades or your whole portfolio if need be. To me, that is invaluable.
They also provide leverage. You can use less money to have more exposure to a stock’s piece movement, especially expensive stocks like Amazon Inc. (NASDAQ:AMZN), for example. This in turn gives you more flexibility.
And lastly, options can generate income. Reducing risk is the most important attribute of options, but being able to increase your profits is not such a bad thing. The best part about options is that there is a strategy for whatever your outlook may be. With stocks, you simply can’t make money from a sideways position solely on the underlying.