Are Stock Options Really All It’s Cracked Up to Be?

Stock Options are as old as Greece in the 7thCentury BC. The oldest known account involved Thales of Miletus predicting that the yearly olive harvest was going to be abundant, then immediately placing a deposit on all olive presses in his region. The harvest proved him right, so when the demand was overwhelming Thales ended up selling his options for considerable profit. In the modern world this is called a pro-active transaction.   As far as the stock market is concerned stock options enable you to control stocks without owning it.

There is a rapidly growing awareness of how stock options work, particularly because stock options are often being awarded to employees (not merely the executives), allowing them to purchase the company’s stock at a lower price than its market value after a given period. And with brokers offering free option-trading tools as well as declining commission rates, myths about the finicky nature of the stock market are gradually being reconsidered.  

The popularity of Mutual Funds has been shaken by its response to economic transitions. Mutual funds are slowly revealing themselves to be an uneventful struggle, lagging the market during advances as well as accelerating downward spirals in the economy. This is probably the other reason why investors began looking elsewhere to profit from capital. Strong voices from the millionaire community are insisting that stock options are the secret to their success. Yet that claim does bring resistance, as others are ready to tell you disturbing stories about how they lost a fortune trading stock options. But the self-made millionaire is ready with a retort: that these stories are more an example of lack of experience, leaping without testing the waters, and bad management.  

Which is a fair call, because most of the stories I’ve heard of people who’ve lost a ton with stock options are about them responding to their own greediness and investing everything into what they believe is a done deal. Based on what? Usually someone who prances around in a Ferrari (on loan), and insists he’s got the answers on how to make you stinkin’ rich. You’re bound to meet such sorts, but the onus is on you to judge for yourself. Because you just may end up talking to a real financial success. And even then, test out what he says.     

If you look at the advice given on many ‘how to trade stock options’ manuals, there is a clear emphasis on learning the skills before you actually start playing with money. Investors are encouraged to paper trade (that is, practice with wooden swords) until you gain a thorough understanding of the principles involved. Don’t start real-money trading until your maneuvers are producing at least eight successful trades out of ten.   Reasonable enough. The stock market isn’t about market prediction, it is about risk-management.

And it’s exactly this kind of thinking that lead to the use of stock options to create spread trading which is often preferred over directional trading. In other words; don’t put all your eggs in one basket. Yet this is one principle out of many. Try paper trading, test out stock options for yourself, because you shouldn’t take my word for it.