Have you ever heard that options are risky? I am sure you have. Have you also been asked if you have made or can make any money trading options? I am sure you have as well. When people ask me if trading options is worth it, I give them my standard answer. I tell them it depends on two things: you and what you hope to accomplish. I will elaborate a bit on each point, but there are certain things option trading can and cannot do and you need to understand this before trading options. That said, options can lower an investor’s or trader’s risk and produce profits and losses as well.
It All Boils Down to You
Let’s start with you. As humans we are not particularly designed to be traders. The emotional aspect of trading is huge. Many traders and investors are not prepared for it, and most do not overcome it. We are not geared as human beings to be wrong. With trading, you will often be wrong. I hired a trading psychologist myself, and it was the best money I ever spent. So aside from knowing what options can and cannot give you, you need to ask yourself, “Can I handle trading and being wrong?”
Hedge to Reduce Risk
Options cannot perform miracles contrary to some emails you might see from various education companies, and you definitely can lose money trading them. But options allow you to hedge, use leverage and generate income. Hedging essentially reduces risk. It can protect individual trades or your whole portfolio if need be. To me, that is invaluable and should help you sleep better at night.
Options Give Leverage
Options also provide leverage. You can use less money to have more exposure to a stock’s price movement especially expensive stocks. This in turn gives you more flexibility and allows you to participate in stocks that might be out of your normal price range. How nice is that?
Options Generate Income
Lastly, options can generate income. Reducing risk is the most important benefit of options, but being able to increase your profits is not such a bad thing. The best part about options is that there is a strategy for whatever your outlook may be. With stocks, you simply can’t make money from a sideways position solely on the underlying. So, can option trading be risky and can it be hard to make consistent money trading options? Yes, and yes. But with a proper education and a focus on your discipline, options can be life changing.
