Investing using options is very different from constructing a classic long-term buy-and-hold portfolio.
In this segment from Motley Fool Live that first aired June 7, Motley Fool Canada analyst Jim Gillies and Fool.com editor/analyst Ellen Bowman discuss why it's important to be patient, even when using a short-term strategy such as an option.
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Ellen Bowman: Jim and I were together about a month ago to talk about Options Investing for beginners. We worked together for a long time, we both worked on The Motley Fool Options service. While we both have other roles in the company now, I wanted to come back to Jim now because I as an investor am ready to start investing with Options. One of the points that we make in the service, is that if you have $5,000, Options might not be where you want to start. You need to build a long term buy and hold portfolio first before you decide that Options are to be layered on top of that. Last time, we discussed covered calls. What were our takeaways from our last discussion?
Jim Gillies: I'm going to say, my one takeaway about it is covered calls are the strategy that I like the most for beginners because it's exceedingly hard to blow yourself up with them. Almost impossible. You can call me a nervous Nellie, you can call me a fraidy cat, whatever you want. When you sat in your kitchen as your friend cries on your shoulder because their husband incinerated about 70 grand by playing with Options when he shouldn't be.
Bowman: Oh, no.
Gillies: That's a life changing experience. That's a, "Yeah, OK, let's not do this." We're going to talk a little bit about that today. But I want people to use Options responsibly. Look, people don't want to use Options ever, that's perfectly fine. You don't need it to have fantastic investing returns. I don't know this for a fact, but I am reasonably certain David Gardner has never played with an Options contract in his life, and he's done OK. But for people who do want to use it as a tool, who do want to, as you say, layer it onto their portfolio as they grow their portfolio and they get more education. Because of the propensity for Options to bite hard if the market turns against you, I'm a big fan of know the risk first. Because if you know the risks and the downside from the problems, the rewards will take care of themselves as long each work to mitigate and work against the risk.
Bowman: Set the right system in motion and then wait for the results. It's the way I think of having edited many of your options and recommendations. [laughs]
Gillies: I'm sorry. [laughs]
Bowman: No, it was a delight. But you make your choices and you wait.