The Seven Myths of Options Trading

In my 14 years of as an options trader-10 of those spent teaching individuals to trade options-I have heard the story many times over of how options are so risky.  It is my intention to dispel these myths so that the reader can make informed decisions as to the true merits of trading options.  Hopefully, a few of you may be inspired to become full blown options traders with the ability to take advantage of the many opportunities the market offers. Isn't it time you learned how to make money regardless of whether the market goes, up, down or trades sideways? 

Myth 1: Trading Options is Just Too Risky.

Everything comes with a certain degree of risk in life, especially if you are unaware of the dangers involved.  Driving a car is extremely risky if you don't know what you're doing. Just walking across the street is dangerous, especially big cities where impatience and road rage lurk just beneath the surface of the seemingly most mild-mannered drivers. So you learn to follow the rules to increase your chances of survival. When it comes to trading, it is essential to learn the rules and follow them.

Myth 2: Stocks are Safer than Options

The problem with stocks is that no matter how safe you think you are, you still have way too much money on the line.  When using options, you can be creative and make money whether the market goes up down or sideways.  You just have to have the knowledge to create scenarios that give you the highest possible return with the lowest amount of risk. 

Myth 3: You have to be a math genius to understand options.

This myth stopped ringing true after seeing many students make an excellent living trading options upon learning just a few of the risk management principals we teach.  Trading options primarily requires basic math skills: adding, subtracting, multiplication and a little bit of division.  Hopefully, most of us learned these skills in school.  Besides, these days, computers do it all for us! 

Myth 4: For every winner there is a loser.

Just because you win on a trade doesn't mean that the other party lost money.  If you buy an option, a market maker will often take the other side of trade. Market makers  make most of their money on the bid/ask spread. They don't just sit around saying selling options in the hopes that the buyer is wrong. They look for the best hedge to lock in their spread profit.  This means that both the buyer and the seller can be winners.

Myth 5: 90% of all options expire worthless.

Options do expire worthless; but options also expire with real value. It is more likely that approximately 50% of all options expire worthless.  Options expire at close of business prior to the third Saturday of each month. On this day, there are thousands of options with strike prices above and below where the stock is currently trading.  Bottom-line, some options expire worthless while others expire with value; saying that 90% expire worthless is ridiculously misleading.

Myth 6: All stock brokers understand options.

Not all stock brokers understand options.  You can easily find out by calling your broker and telling him (or her) that you want to do a Bull Call Spread (a basic bullish options strategy that combines the purchase of a lower strike call with the sale of a higher strike call). If your broker doesn't have a clue as to what you are talking about, then it's time to get a new broker.  They may have the best of intentions, but don't have the tools to help you to succeed in the options trading arena.

Myth 7: Everyone loses money trading options.

To make money in the options arena, you need to get to know the rules of the game.  Bottom line: the key to success is knowledge.  A lack of knowledge in any market-options, stock, futures, or bonds-will likely result in a loss of money.  Of course there's risk involved when you trade options. However, if you know what you're doing, and when to apply the rules, as well as the inherent pros and cons of puts and calls, you'll have a much better chance of developing a winning approach to today's volatile markets.

Options allow you to creatively attack the markets in ways that simply are not possible if you just trade stocks.  Think about it. Why did mutual funds lose so much money in the last three years?  Primarily because stock traders have only 2 choices: when to buy stock and when to sell stock. Options are the most flexible financial instrument ever invented. It just makes sense to have as many "options" as possible, especially considering the geopolitical challenges of the day and their long-reaching effects on the stock market down.

George Fontanills
President Emeritus
Optionetics.com

GEORGE FONTANILLS is the President of Pinnacle Investments of America, Inc., a registered investment advisor and a hedge fund manager in Boston. A highly acclaimed author, George teaches innovative options trading across the country through the Optionetics Seminar series.

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