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CATEGORY Options

Some of the Worst Trading Myths to Always Ignore



September 25, 2017

To this day, traders are still scared to death of options.

They’re too volatile. Stocks are safer. It’s too hard, they say. It’s only for the rich.

Sure, there are risks. But all investment vehicles carry risk. But as compared to stocks, options are oftentimes cheaper and much more lucrative. Let’s use Apple (AAPL) for example.

As of late September 2017 for example, I could buy 100 shares of Apple for $16,000. Or I could pick up those same 100 shares for just $860. That’s a savings of $15,140 by the way.

But wait a minute. Where did I come up with $860?

By buying the AAPL November 155 call options, I can secure that price.

Now, let’s say shares of Apple move from $160 to $161 a share. That’s a whopping 1% gain on $16,000 risked. That’s not much. But if I bought the AAPL November 155 call, I can make even more money with every $1 move higher in the stock. In fact, if I were to buy this call option at $860, I can make a potential profit of 8% every time shares of Apple move up just $1. That’s calculated using delta, by the way.

That dispels the idea that options are far too expensive.

Another wild myth is that options are for professionals with years of experience, which isn’t true at all. If this were true, you couldn't find the thousands of sites and software solutions offered for beginners. We can also dispel this with the fact that since 2007, daily average options volume has exploded from 11.7 million to 16.5 million today.

Most of that volume is from traders just like you and me.

You have to be rich to trade options is one of my favorite myths. But all we have to do is refer back to the Apple example above to dispel it. Remember, I can buy 100 shares of the stock for $16,000, or have the ability to control 100 shares for just $860 – a savings of $15,140.

Another interesting myth is that options are far too difficult to understand. This is probably the laziest excuse I’ve heard from students. But if you can understand that you’d buy a call option based on the idea that a stock will move higher, you’re on your way.

Or, oftentimes I’ll hear that folks won’t trade options because 80% to 90% expire worthless.

Again, it’s not true, though. Plus, options traders aren’t usually holding options through expiration anyway. We’re using stop losses or jumping out with gains in hand. The idea that 85% of options expire worthless is from a famously flawed SEC study... which didn't account for exiting options prior to their actual expiration.

Do yourself a favor. Ignore options myths. You really are missing out on opportunity.


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