Saturday, October 6, 2012

Why Should I Learn to Trade Options?

So you're interested in the market. Know a bit about a few stocks. Even invested in them. So why should you learn about options; aren't they for the professionals? Aren't they dangerous and complex? Shouldn't you stick to what you know?

Well many of us would say that it's traditional stock investing that's complex and dangerous. High frequency trading dominating trading volumes with one firm's algorithm battling another's, usually at the expense of the average retail investor; prices driven as much by offshore events as by company value; and regular wild intra-day swings all contribute to the current difficult trading environment.

However, at the same time, the actual process of trading has become much easier. Markets previously open only to professionals - derivatives, forex, offshore markets etc - are now available at the click of a mouse, at a reasonable commission, to anyone with a computer. So how to take advantage of this increased freedom, profitably?

Well, I'd suggest options are the best, most flexible, market available to the non-professional in today's environment. Why? Well, what's difficult about traditional investing is its restriction on 'betting' on the upwards direction of a stock; success is defined by picking those stocks that will rise.

Even if you choose a good company, buy it at an undervalue price and constantly monitor its performance - in other words you are a good value investor - it only takes a week of bad news from Europe or lower than expected US employment numbers or some other external shock for the stock to fall. There's nothing more disheartening that seeing your well researched investment in the next Apple, say, be somehow derailed by a shock on the Portuguese bond market (or some other such seemingly irrelevant piece of news).

So much for value investing; what about short term/day/technical trading? Many do make good money from the likes of trading technical support and resistance, the short term effect of news events such as the FOMC meetings or even scalping the forex market. However you need a level of training, knowledge and several months, if not years, of losses before you can find a reliable edge. I'm are also rather sceptical of some of the more esoteric methods touted as the holy grail of such approaches (a Head and Shoulders Fibinacci Elliot Wave anyone?).

Which leaves options which are, indeed, often dismissed as too complex, with a requirement for a high degree of mathematical sophistication, for the average investor. However I'd argue that options are actually the ultimate flexible, well, option for expressing a view on a wide range of expected market outcomes. With perseverance and proper assistance I believe any trader can do well.

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