Quote:
Originally Posted by Marshal Davout
I don't do the fancy stuff such as puts and calls or any day trading as it were.
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I took a deep dive into options some time ago and not a fan. I'll explain why.
There are two distinct advantages of options that draw in the novice: They are highly leveraged so buying a call or put is relatively cheap compared to buying the stock outright. Your loss is limited to what you paid for the option. So if you like Stock XYZ and it's at $90 and you think it will go to $100, you might pay $150 for a call option with a $100 strike price. It doesn't hit the target by the time it expires so you lose your $150 and that's all. You might think of it as a victory that you didn't lose your shorts and it was "worth a shot." But now you are not trading, you are gambling, so welcome to the casino.
The winner is the guy who sold you that option, who now has your $150 in his pocket. The professional traders are sellers of options, not buyers. They do what they did to you hundreds of times a day, taking money from those who hope their stock suddenly shoots up (or down) to hit their strike price.
They know that for the vast majority of time, stocks are locked in a price range (like your Amazon and Google shares). Eventually they might go substantially higher, but you don't know when. It might take months or years. So novices might keep buying call options with 30 day expiration over and over again thinking eventually their stock will take off, and they keep losing their premium each time it expires worthless.
Option sellers have access to advanced algorithms that calculate fair option pricing and probabilities that a stock will remain between two price points, and they start selling options outside of that range. So mathematically, sellers are at a distinct advantage, if they know what they are doing of course.
So you are wise to stay out of them.