There is a whole bunch of stock options trading advertisements spreading all over the Internet but how accurate are the claims and how large is the hype when you begin to seperate the shaft from the grain?
The usual claim is 300% return here and 100% return there; or the like on stock options trading. Being a seasoned currency trader i decided to take a look and after 6 months of stock options trading I was not impressed with the results.
There are several problems with stock options trading.
Firstly, the only people who really make money are the 'option writers.' But there is a good reason why stock trading platforms try to discourage you by asking high amounts of cash deposit. it is because the industry profits tend to be kept as institutional. Writers receive option writing premium and on a 90% degree probability they will see the options expire worthless and pocket the premium because of the equation ot Time-Decay. So, knowing that a stock option rapidly runs out of value why on earth would you purchase an option in the first place to trade and hope that it will increase in value?
Secondly, people who buy options in large amount actually use them for the purposes for which they were originally intended. That is they buy them with the intention not to trade them but to hedge a portfolio of stocks. The time decay rapidly builds up and the options can be renewed. Options are in all essence a means to hedge and not a means to find an incremental value and bet your whole house on it!
Thirdly, entry and exit fees to buy an option and close often work against the trader. To make money the options price has to change greater than $30 in 1 week on an option with 90 days left to expiry. Stocks trading at $30 range are usually reflecting options prices in the $300 range not including entry fee. Go look at the NYSE or Nasdaq and you can pull down countless big companies whose stock prices are trading in the $30 range. So if you need the option to increase in value > $330 for the option price, then we are talking about a movement of 10% just to break even on the trade. You will need about $15 to enter the trade and then another $15 to close out the trade. At least 90% of the time the options price has not moved a tick in a week and youre left holding the hot potato with a rapidly eroding value trade.
Fourthly, the VIX, or volatility index which underlies the rate of change in stock prices, and options prices, rarely moves in the long run to add volatility to change the stock option prices. For your typical $300 entry position to > $330 we would need a spike in the VIx in a week of more than 3.00. Apart from the recent election panic that his US stock markets doesn't really happen often.
So in conclusion; subscribing to newsletters that punt a tip to buy a call or put option on a stock can be a very dangerous game since 90% of the time the options work against you as a trader.
In the futures markets options can work for you as the volatility can be greater than in the stock markets. I have bought options to hedge my currency futures effectively and closed out the option with good timing. The same can be said with the commodities markets. But the only problem is the costs involved. Locking into a currency future could set you back a good $3000 with another $3000 on a hedge. So the costs of options trading in the futures markets are cost prohibitive considering you do not want to expose more than 5% the value of your portfolio to a single trade.
I have traded forex and futures options successfully but can fairly say that after 6 month of evaluating stock options - I would give it a miss as the entire premise of making money is structurally unsound.
So in conclusion; if you want to look for a second income to help grow your savings, speaking from my own trading wisdom, I personally do not think that stock options trading per se is a very good idea at all Forex trading can yield better long term results.
Disclaimer - All trading can be dangerous and result in a loss of capital.
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regards
B. Bernard.
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