Why So Many Investors Lose With Optionshttp://www.fool.com/investing/options/2013/07/10/why-so-many-investors-lose-with-options.aspx Dan Caplinger
July 10, 2013
The promise of getting rich quick never goes out of style. Whether it's the latest side-business scheme or the perfect penny-stock pitch, many people are vulnerable to questionable and risky strategies that hold even the possibility of producing great wealth.
Unfortunately, even legitimate and useful tools to help people with their investing are prone to misuse, and recently, options trading has gotten a lot more attention, becoming a focal point for ordinary investors and the discount brokers that serve them. Let's take a look at why trading options is somewhat controversial and why you shouldn't just dismiss options out of hand.
The search for more business
The problem, though, is that research suggests that options traders don't have very good performance. One issue is that by their nature, options are generally short-term instruments, distracting investors from long-term trends and instead forcing them to assess probabilities of share-price movements over very short periods of time. Yet arguably, the bigger danger with options is using the extensive leverage they offer to take on too much risk.
Options are what you make of them
Unfortunately, such strategies also produce 100% losses on a fairly regular basis when investors don't have perfect timing in making the right call about a stock's direction. That's a big part of the reason that options traders routinely lose money: They ignore the very real risk of losing everything by not controlling the amount they risk on a particular position.
But high-risk strategies aren't the only way to use options. Often, you can use options to reduce the risk in your portfolio or to take on risks that you're already comfortable with. For instance, if you want to hold on to a stock you own until it reaches a certain price but then plan to sell it, then writing a covered call allows you to receive a premium that you wouldn't get from simply setting a limit sell order. Similarly, if you know you want to buy a stock if it drops to a certain price, then writing put options can similarly pay you a premium and result in your getting that stock at the price you choose -- again, a better result than simply