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Stock Options 101

Welcome to Stock Options 101

Our goal is to explain stock options in simple English. As you learn more, you will appreciate how difficult a task it is. People say that investing in stock is like playing checkers, while investing in options is like playing chess. We look forward to teaching you how to play the more complex game of stock options.

Are Stock Options Risky?

Most people would answer that question with a resounding "yes". True, according to some studies, over half of all options that people buy end up being worth absolutely nothing. Nada! Tear up your ticket stub and walk away.

If buying options is such a bad investment, maybe a strategy of selling options to someone else would be a better idea. Let their loss be your gain. But there is a problem here as well - it is called selling a naked option, because that is how you feel for the whole time you have sold that option. You are facing a theoretical unlimited loss. You can lose many more times the amount you invested. At least when you bet on a horse, that is all you lose when he trips on his way to the finish line.

So if buying options is usually not a good idea, and selling them can be worse, it is easy to see why people decide that options are risky no matter what you do. It does not occur to most of them that a strategy of buying an option and simultaneously selling another option to someone else might be an entirely different story.

This website is designed to explain an options strategy that we believe is less risky than buying stock or mutual funds, and potentially a whole lot more profitable. We hope you will read through this material and learn to love the world of options as we do.

Why Trade Stock Options?

Stock options are exchanged for two main reasons: for speculation (adds risk) and for hedging (reduces risk).

Speculation

Stock options are a way of leveraging your money. This is usually done by buying call options. You are able to participate in any upward moves of a stock without having to put up all the money to buy the stock. However, if the stock does not go up in price, the call option buyer may lose 100% of his/her investment. For this reason, options are considered to be risky investments.

Hedging

Stock options can be used to considerably reduce risk. Put options are usually traded for hedging purposes. While hedging reduces risk, it also limits the amounts of gains you can make. Since most stock markets go up over time, and most people invest in stock because they hope prices will rise, there is more interest and activity in call options than there is in put options.

Terry's Tips Stock Options Trading Blog

July 29, 2014

3% a Week Possible With This Strategy?

Today I would like to share a strategy with you that seems to make sense to me. I have not back-tested it, and I am not exactly positive that it will work. But I think it will. And I will only need to commit $1500 to test it out (actually, a little less than that as you will see). I invite you to follow along if you wish. For the next few weeks, I will send out any trades I make so you can mirror them if you wish.

My gut feeling tells me that this strategy could make 3% each week. I have set up a separate brokerage account with $1500 to test it out.

Terry

3% a Week Possible With This Strategy? This strategy is based on my favorite . . .

July 21, 2014

Finding Lessons in a Trade

Last week I told you about a bullish short-term bet we made on SVXY because the stock had dropped over $3 in the previous week (and historically, 4 out of 5 times when that happened earlier this year, the stock rose at least $3 in the subsequent week). We placed an order to sell half the calls if they had doubled in price, and that occurred on Tuesday. On Thursday, volatility soared due to the plane being shot down over Ukraine and Israel invading Gaza. It looked like we would just break even on the trade since we had recovered the initial investment, but then, on Friday, the stock rallied $6 and we were able to sell the remaining half for enough to give us a 32% gain on the trade. Not as much as we had originally hoped, but a gain of any sort is always welcome.

Terry

Finding Lessons in a Trade

The big lesson from our experience last week, one that we have had many times, is that there is . . .

July 14, 2014

A Possible Great Option Trading Idea

Just before the close on Friday, we made a strongly bullish trade on our favorite underlying stock in a portfolio at Terry’s Tips. In my personal account, I bought weekly calls on this same underlying. As I write this in the pre-market on Monday, it looks like that bet could triple in value this week.

I would like to share with you the thinking behind these trades so next time this opportunity comes up (and it surely will in the near future), you might decide to take advantage of it yourself.

Terry

A Possible Great Option Trading Idea: As we have discussed recently, option prices are . . .

Making 36%

Making 36% – A Duffer's Guide to Breaking Par in the Market Every Year in Good Years and Bad

This book may not improve your golf game, but it might change your financial situation so that you will have more time for the greens and fairways (and sometimes the woods).

Learn why Dr. Allen believes that the 10K Strategy is less risky than owning stocks or mutual funds, and why it is especially appropriate for your IRA.

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