This gives me a feel for how the average person gets into the investing and trading world and when it comes to options almost everyone new to the game makes the same mistakes. That is they try to use options as a substitute for buying stocks. They like the idea of putting a little bit of money into something and having the chance to make a lot of money. So they get the idea that they can leverage themselves with options and make a killing.
So what the average person does is use options to make a big bet with or against a stock. Instead of simply buying a stock and hoping it goes up they decide that they can use a little bit of money to bet big on their stock by buying calls.
Or if they think a stock will drop they'll buy puts to profit that way. In other words they use options to leverage themselves in one directional bets.
The problem is that this doesn't typically work too well. What the people don't factor in is that options exist in their own world. They do not factor in the price they are paying for the option, which can vary wildly due to volatility premium and time decay factors that literally can change throughout the day for any individual options contract.
It is these option values that end up making a big difference in whether or not you will make any money in an options purchase that most simply ignore completely. In order to trade options then you have to be a true options trader and not just someone trying to use them as substitutes for buying stocks or short selling them.
You can figure out these values and decide whether an options contract makes sense through various sophisticated options programs out there. You can also find experts with services who can give you good options trading strategies to use in order to make money. There is simply so many better ways to play options than to do one direction bets with them.
You must go beyond the one directional bets to put yourself above the 90% who end up losing in the options arena. You just got to apply yourself and go from there. You have to be a serious trader of options themselves and not another options nut to win at this game. Do that and you can take money away from the nuts who refuse to apply themselves.
The Right Way to Trade Options by Mike Swanson
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