Are options risky?
Options traders have the ability to buy and sell options. In the case of selling options, you would be the one providing the insurance – the insurance company. In exchange for providing protection, you collect a premium. But it’s important to realize that the buyer’s protection is the sellers risk. If you do not mitigate your risk you could be exposed to significant risks. You can sell options with a strike price that is further away from the stock price.
Let us look at the following example Facebook is trading at $55, The option price of a $60 Strike March call is $3. The stock prices moves up to $70 by expiration. We compare the performance of the stock with the call:
Stock will gain $15 ($70-$55) that is an rise 27%
The Call option will gain $7 that is a 233% ($70-$60-$3) move
Therefore, given the scenario above, an investor would spend $5,500 to buy 100 shares of Facebook and realize a gain of $1,500. An option trade that buys only 2 call contracts (of 100 shares each) and spend $600 ($3 X 100 shares X 2 contracts) He/she realizes a gain of $1,400 ($7 X 100 shares X 2 contracts) which is about the same gain as the stock investor who spent $5,500! The worst thing that can happen to the option trade is that he loses his $600 investment.
My favorite financial network tastytrade did a comparison between a put and an option. They show that Historically, has been a better strategy than buying 100 shares of stock. The main reason is that the credit received from the put gives the trader more opportunity to be profitable. In the past, the comparison has been based on profit per day, average profit per trade, and win rate.
At selloptionpremium.com we like to sell options. We receive option premium at the sale and like to reduce risk to sell out of the money options, or with expensive stocks we sell spreads. By taking profits early we make sure that profits does not run away.