Tall Tales: Two Common Myths You’ll Hear About Trading Options

AdamOptions are one of the most misunderstood investment vehicles in all of finance.

Some think you should avoid them like the plague. Others, like myself, see the tremendous upside.

So today, there are two myths about the dangers of options that I’d like to discount once and for all.

Myth No. 1: “Most options contracts expire worthless.” Heck, some think it’s as high as 90%!

That’s a pure, unadulterated lie.

The Chicago Board Options Exchange has shown that only about 30% of options contracts expire worthless. The 90% figure originally came from an SEC study that was fundamentally flawed.

Still, some investors choose to believe that 90% of options expire worthless. These investors then think that selling options 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 dangerous strategy… one with unlimited risk. And it’s these “naked selling” option strategies that lead investors to believe another gross generalization…

That brings us to myth no. 2: “My risk is UNLIMITED when trading options.”

This statement is also false (if you trade options the way I recommend).

If you choose to employ a strategy that only purchases options contracts, you’re actually limiting your investment risk.

In fact, buying an options 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.

And since you can buy most options 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.

Of course, not all trades go in our favor.

Sometimes we have to take a loss, which can mean a 100% loss of the debit we paid for the call options we purchased. But we’ll lose no more than that, and the upside potential of our option plays is often much greater than 100%.

As you can see, our risk is completely limited, while our profit potential is unlimited!

Many of my current subscribers have admitted that they had no experience with options prior to joining my services, yet feel perfectly comfortable trading options with my guidance. Options “pros” also tell me they find my trades very valuable.

Several of our trading strategies, not just mine, employ the use of options. So keep checking your Cycle 9 Alert and Max Profit Alert emails, as well as those of our other editors, to see how we’re bringing you the best value with this incredibly lucrative investment vehicle.

Best,

Adam O’Dell, CMT

Chief Investment Strategist, Dent Research

 

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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.