Repeat After Me: Options… Are… NOT… Risky

If you ask many stock-market investors what they know about stock options, you’ll get the same answer:

“They’re risky.”

But that, my friend, is pure, unadulterated misinformation. It’s hogwash.

Like most wives’ tales, there’s a shred of truth, mixed in with gross generalizations, behind the “risky” label that stock options have erroneously been given.

For example, you must have heard the comment: “Most (upwards of 90%) option contracts expire worthless.”

Well, that’s one completely false generalization that’s used to persuade investors to NOT buy stock options.

In reality, the Chicago Board of Options Exchange has shown that only about 30% of option contracts expire worthless. The 90% figure is misinformation that originally came from an SEC study that was fundamentally flawed.

Still, some investors choose to believe that 90% of options expire worthless (even though it’s a lie). These investors then think that selling option contracts is a better strategy… so that’s what they do, aiming to reap gains when the value of the contract goes to zero.

Yet, this can be a very risky strategy… one with unlimited risk. And it’s these “naked selling” option strategies that lead investors to believe another gross generalization…

That is: “My risk is UNLIMITED when trading options.”

If you choose to employ a strategy that only purchases option contracts, that statement is completely false. In fact, buying an option contract is the ONLY way to guarantee you won’t take a loss more than you’re willing to accept at the onset of the investment.

You get a 100% guarantee that you cannot lose more money than you have invested in the contract. And since you can buy most option contracts for just a few hundred dollars (instead of a few thousand dollars, as with stock shares), you can play the market with only a small amount of capital and risk.

That’s exactly what we do with Cycle 9 Alert. We buy option contracts (mostly call options, which are bullish) that expire about three or four months down the road. Then we watch the value of our option contracts rise and fall as the underlying stock price rises and falls.

Here are two real examples from Cycle 9 Alert, one for a loss and one for a gain.

  1. On January 14, I recommended buying call options on the SPDR Consumer Discretionary Select Sector ETF (NYSE: XLP). 

    Total Cost: $80 per contract
    Total Risk: $80 per contract (never a penny more!)Result: Loss of $72 per contract (position is still open)

  2. On October 22, 2013, I recommended buying call options on Royal Dutch Shell (NYSE: RDS.B). 

    Total Cost: $275 per contract
    Total Risk: $275 per contract (never a penny more!)Result: Gain of $539 per contract (position is still open)

As you can see, we’ll likely lose 100% of the $80 we paid for the XLP call options. But we’ll lose no more than that.

And we’ve earned a 196% profit on our Royal Dutch Shell call options.

As you can see, our risk is completely limited, while our profit potential is unlimited! So far, we’ve had 24 winners out of 31 trades, for a 77% win rate.

That’s a pretty good deal, if you ask me… and far better than the lazy man’s view of options.

Many of the current subscribers to Cycle 9 Alert have admitted that they had no experience with options prior to joining my service, yet feel perfectly comfortable trading options with my guidance. (Options “pros” also tell me they find the service very valuable).

Click here to learn more. And next time you hear someone say that options are risky, please slap them… then forward them this email.

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Categories: Investing

About Author

Adam O'Dell has one purpose in mind: to find and bring to subscribers investment opportunities that return the maximum profit with the minimum risk. Adam has worked as a Prop Trader for a spot Forex firm. While there, he learned the fundamentals of trading in the world’s largest market. He excelled at trading the volatile currency markets by seeking out low-risk entry points for trades with high profit potential. An MBA graduate and Affiliate Member of the Market Technicians Association, Adam is a lifelong student of the markets. He is editor of our hugely successful trading service, Cycle 9 Alert.