OptionsHouse

Options Trading News

July 4, 2013  Thu 6:22 AM CT

SPX: SEE CHART GET CHAIN FIND STRATEGIES
People get into option trading for a number of reasons, but there are three primary motivations: to increase income, to protect positions, or to increase leverage.

To that point, a few articles caught my attention this week. The first was in the New York Times and discusses the perils of options trading, especially for the retail investor.

There is no question that option trading can be risky and that you can lose a lot of money if you're not sure what you are doing, in some cases even more than you have in your account. And there are brokers who push options for their own profit. TD Ameritrade is at the heart of the Times article, and I can safely say that options were the brokerage's focus even before the crisis in 2008 (as I worked for them at that time).  

But options make good sense when they are understood correctly. Using options to increase income and/or hedge positions actually makes your account less risky, not more. It is true that such strategies will dampen returns in strong bull markets, however, so using small amounts to make leveraged directional bets can be a good way to aid returns.

The key is good option education, something we pride ourselves on offering here at optionMONSTER. I do find it funny that the article notes that "the brokers said they guarded against customer losses by allowing only wealthier and more experienced customers to proceed to more complex trading strategies." The irony is that the "more complex strategies" are usually less risky when used properly. I would take a vertical spread or a butterfly over an outright option purchase or sale almost any day.

The second set of articles involes a current tax proposal that could undercut the above strategies. From what I have read, the changes would greatly affect the taxation of strategies like covered calls and puts for hedging. It would make those strategies much less appealing to retail investors. At the same time, it seems that it would have no effect on the strategies that are most likely to see traders lose money.

Once again, education is key here. Understanding the big bad world of financial "derivatives," or at least of listed options, is necessary to make good choices--both for traders and for our government.

(A version of this article appeared in optionMONSTER's Advantage Point newsletter of May 29.)
Share this article with your friends


Related Stories

SPX

Stocks drifting at bottom of range

March 27, 2015

S&P 500 futures are off 0.1 percent, while European markets are mostly higher. Asia was mixed overnight. Oil and metals are under pressure as the euro surrenders some of its recent gains.

SPX

Revised GDP, Yellen lead calendar

March 27, 2015

The final reading of fourth-quarter gross domestic product is due at 8:30 a.m. ET, and Federal Reserve Chair Janet Yellen is slated to deliver a speech at 3:45 p.m. ET.

SPX

Stocks fall amid Yemen airstrikes

March 26, 2015

S&P 500 futures are down 0.7 percent, while the Nasdaq remained weaker with a drop of 1 percent. European indexes slid 1-2 percent, and Asia was broadly lower overnight. Oil and the yen are surging.

SPX

Jobless claims lead quiet calendar

March 26, 2015

The report at 8:30 a.m. ET is expected to show that 290,000 Americans sought unemployment benefits for the first time, down slightly from 291,000 the previous week.

SPX

Stocks edge lower, drifting in range

March 25, 2015

S&P 500 futures are down 0.1 percent as investors wait for the next catalyst. European stocks are lower as well, while Asia was little-changed overnight.

Invest Like a Monster - San Diego: June 26-27

Premium Services

Archived Webinar

Education & Strategy

Short Gamma

Last week, we talked about long Gamma. We said that long gamma is acquired by purchasing options and when you...

View more education articles »