Trading options is not like trading stocks. Most investors make the mistake of bringing their experiences and ideas about stock investing into the field of options. They view options as a leverage investment on a given stock or ETF and nothing else. Whatever direction the market moves decides the fate of your trade. This might be the case when trading stocks, but it doesn’t have to be so with options.
What Are Options?
Options traders do not view the markets as binary (long or short). Rather, an options trader makes an assumption based on his view of the market. He determines how bullish or bearish he is and applies the options strategy that best serves his assumption. Once the options trader chooses an appropriate options strategy, he has the ability to choose a specific probability of success and the risk tolerance of his choice for each and every trade.
You simply can’t craft such specific and effective investment strategies in stock trading. Stock traders do not have the ability to be partially correct and still make exceptional returns. But that’s the whole point of using options effectively: putting yourself in the position to make money, even if you’re only partially correct in your assumptions.
Investing in options can allow you to make money on the randomness of the market – bullish, bearish or neutral, it doesn’t matter – as long as you give yourself some cushion.
I realize this concept might be foreign to some. There are risks and tradeoffs associated with options. But it’s a mistake to see any asset class as being non-risky. And risk should not be a reason to avoid sound investment strategies. Because you can’t avoid risk in the financial world. Even holding cash has risk. I am confident that once you learn how to properly use options, you will immediately find them to be the most powerful tool in the investment arena. Not only that, I feel they are a necessity to outperforming the market.