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Slash Your Risk and Make Money with Traded Options

InvestorEducation / Options & Warrants May 31, 2012 - 12:46 PM GMT

By: Money_Morning

InvestorEducation

Best Financial Markets Analysis ArticleMichael C. Thomsett writes: If you feel like Alice in Wonderland when you start to look into options trading strategies, you're not alone.

Even so-called "experts" struggle with options. It gets even uglier when they attempt to bring it down to earth for their readers.


Yet, if anyone can do it, I can.

I've written six books about options, and have been trading options myself for more than 35 years.

It means that I have already made every mistake in the book so you don't have to.

So why should you learn about and invest in options?

Done right, you can use options to create a virtual cash cow - often quickly, and often with very little risk.

Options Trading in Action
Consider the case of the SPDR Gold Trust (NYSEArca: GLD). A year ago, GLD shares were trading for about $130.

Say you felt pretty confident GLD was going to go up in the next 12 months. You could have gone "long" GLD by buying 100 shares.

Of course, you'd have to be ready to plunk down about $13,000 for them. But if you had that kind of cash you would have done pretty well.

A year later, GLD was trading at $160, and your 100 GLD shares were worth $16,000. That's a nice 23.7% gain.

But you would have done even better if you had used options.

Let's say, instead, you bought one $135 call. (A "call" is just a bet on the price of GLD going up from $130; the same thing you're betting on when you buy the stock.)

A year ago, GLD calls were trading at $9.00. So you would have spent about $900 to initiate the trade. Yet by the expiration month, the price of the calls had risen to $28.00.

That means the price of the option "contract" you bought was now worth $2,800-giving you a 300% gain on the very same price move in GLD.

Now where I come from, 300% is much better that 23.7%. That's the power of options.

And there's more...

The Power of Options... to Manage Your Portfolio
Simply put, options are amazing and versatile tools.
They can be very speculative and high-risk, giving you spectacular returns. Or they can be more conservative, giving you consistent double-digit returns while also serving as a tool for portfolio management.

Here's what I mean by "portfolio management."

You can apply option trading strategies to a traditional portfolio of "long" stock positions to manage, reduce, and even eliminate risks.

For example, you can buy puts to play a bear market.

This means you can avoid the high risks of shorting a stock (because you are "long" the puts), yet still profit from a falling market (even while everyone else sings the blues).

There is just no other way to do this so safely.

It's why risk management is one of the most exciting uses of options, as well as the focus of much of the big increase in options trading in recent years.

Because truly, using options to protect your portfolio is a huge trend.

Don't Miss Out on the Options Trading Party
By now, you're probably starting to see how -- and why -- traders use options. You can be a part of it, too.

All you need is some good information (you're looking at it), a short learning curve, and a sense of where the market is heading (you learn that by reading Money Morning every day).

And the options market is not as isolated as you might think, nor is it some exclusive club for the experienced high-risk trader.

Today, options have become mainstream.

Options are being traded on hundreds of stocks, ETFs, and indices. No longer are they viewed as exotic, high-risk, and impossible to understand. And there's no reason you shouldn't be grabbing your share of those profits.

In the pioneer days of options, back in 1973, you could buy a call option on one of 16 publicly traded companies. Puts -- the other side of the coin, a bet that a stock will fall - weren't available at all.

I remember my first exposure to options, in the late 1970s.
I was working in San Francisco as an accountant, and one of my friends told me I should sell options. He explained it like this:

"You own 100 shares and you sell a call. You get the money right away and you keep it no matter what. It could get exercised and your stock sold, but most of the time the call expires. Then you can sell another one."

This, in a nutshell, is how "covered call writing" works, and to this day it remains one of the most popular -- and profitable -- strategies.

But when I first heard about it, I wasn't buying it.

So you can sell something I thought, get the money, and wait for it to expire; then do it all over again? How could you sell something you didn't own?

The questions were endless. That's exactly where a lot of traders find themselves when they first hear about options.

Admittedly, it's a journey from there to a full understanding. But the journey isn't as long or as difficult as you might think.

Of course, some people are too closed-minded to take the leap and try something new, no matter how powerful a tool. That's their loss.

With the help of our experts to guide you through the options maze, you could easily find yourself trading options -- and making money -- very quickly.

That's why I hope you'll continue to read this series. Today's article is just the start.

In the weeks to come, you are going to learn:

•How to open and set up an options account.
•The complete options "lingo" and what each term means for you.
•How to read an options listing.
•What you need to know to structure a winning options trade.
•The ins and outs of basic options trading strategies.
•And much, much more....

And don't worry...we are going to leave the White Rabbit behind.

[Editor's Note: I've seen firsthand over the years just how little people understand about options.
That's why we had Michael create an exclusive investor's guide for you called "The Power of Options."
It's ready for you today if you'd like to read ahead. It could be the most important thing you read all week.
The best part is we are giving it to every single subscriber for free.
It's a guide created purely as a service for our readers. I hope you enjoy it. To access your free investors guide, click here. ]

Source :http://moneymorning.com/2012/05/31/options-trading-strategies-slash-your-risk-and-make-money/

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Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

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