Getting Started in Options
Michael C. Thomsett
The market has changed dramatically in the past few years and, for
those who profited in the past—perhaps significantly—more recent
events have shown that investments in publicly traded companies
are not always as safe as many had believed.
Of course, the experienced investor understands that knowledge and
familiarity with trading risks spell the difference between confidence and
worry. Even the experienced investor may need to adopt a more defensive
stance given the changes in the market. With that in mind, the options
market can play an important role in your portfolio in several ways: enhancing
profits without a corresponding increase in risk, protecting investments
with a form of insurance not otherwise available, and guarding
against loss (at least to a degree). This book explains how these and other
advantages can be achieved through the use of options.
You probably have heard people describe the options market as risky
or complicated. Certainly, aspects of option investing fit these descriptions,
but so do some aspects of virtually all forms of investing. The truth
is, options can take many forms, some high risk and others extremely
conservative.
The risk element does need to be examined and compared, however.
Like the stock market, options are subject to their own special set of rules,
including potential for gain and limits on the degree of profit; the risk and
reward nature of options; timing considerations and the need for close
monitoring of options positions; and the close connection between options
values and the value of stocks associated with those options. You
might ask, “If options are not as risky as I have heard, why don’t more
people take part in options trading?” The answer is twofold. First, the relatively
brief existence of options for the general public has kept this market
removed from the public eye for the most part. Second, while various
options strategies are not as complex as many people believe, the language
of options is highly specialized and, perhaps, exotic. When language
is overly technical, the average person comes away with a sense of
alienation—the language itself, while necessary, also creates a sense of
fear. Unfortunately, the terminology of the options market is far from user
friendly. One of the main features of this book is that it carefully presents
ideas behind the terminology as each new term is introduced, supported
further with examples, explanations, and graphics.
This book emphasizes the strategic use of stock options in several
different ways. In order to determine the suitability of options in your
own portfolio, you need to go through a four-step process of evaluation:
1. Master the terminology of this highly specialized market.
2. Study the options market in terms of risk.
3. Observe the market.
4. Set a risk standard for yourself.
For any strategy to work well, it needs to be appropriate, comfortable,
and affordable. These ideas are not commonly expressed in books
about investing but, in fact, they are of great importance to you when it
comes to the decision point. So you need to keep in mind as you consider
and make decisions about how and where to invest, that the ultimate test
of whether or not to proceed should be to question whether it is appropriate,
comfortable, and affordable. No one idea works for everyone, and options
are no exception. No matter how easy, practical, or foolproof an idea
seems in print, and no matter how well it works on paper, placing real
money at risk changes everything. Your decision has to feel right to you.
Investing in any manner should not only be profitable, but enjoyable as
well. Too many would-be investors make their decisions on the basis of
advice from others—friends, family members, brokers, or books—without
researching on their own, and without studying the attributes and
risks involved in that decision. They overlook the need to study information
and analyze the risk/opportunity before going ahead.
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