Don't Get Burned

Don’t Get Burned

I’ll bet that plenty of cavemen got burned when they first started to use fire. It could be painful, but there were so many advantages to using fire that it was worth the pain to learn how to use it safely. The same holds for stock options.


Stock options are fantastic investment vehicles. Properly understood, options can be used in all market conditions: up, down and sideways. Moreover, contrary to most public knowledge you’ve heard, they can be much less risky than trading just the underlying stock. As a matter of fact, stock option derivatives were invented to provide risk relief for underlying stocks. Options were invented to reduce risk. It was only later that curious and brilliant minds saw the multifaceted ways to use options to make money.


The reason Wall Street retailers try to steer clients away from options is that few retail brokers fully understand them. There is no doubt that a full understanding of stock options requires much more study and a more in-depth understanding than do the underlying equities. Most retail investor-traders don’t have the time or inclination to make the sacrifices in time to learn about them (although this is changing). Because the turnover in retail stock brokers is usually pretty high, the time and money needed to train brokers adequately about options is usually not in the budget scope for most brokerage houses. And it makes sense in that most clients would need to understand options work before feeling comfortable with putting the money up. And this is probably a good thing for those who are satisfied with getting returns that hopefully are close to the composite index. For those who want more and like to be intellectually challenged, stock options offer an array of strategies that can be very rewarding.


But like our ancient ancestors learned, don’t mess with fire unless you understand what it can do-positively and negatively. Stock options are not very intuitive and if you really want to learn about them, you need to take some courses (there are several good online training institutions like ( where you can learn online about these ingenious derivatives. If you are indeed interested in higher potential returns and less risk (yes, they are less risky if used properly) make sure to obtain a full understanding of them before doing any options trading.  If not, like your hairy ancestors, you’ll probably get burned.


Stock options aren’t for everybody but they offer an elegant solution to almost any market situation. As an example, today’s volatile market can be a real opportunity for option traders. One of the strategies a knowledgeable option trader might use in these current rough seas is called a Straddle. This position can allow a trader to profit from a stock if it goes up or down and the risk is limited. If you don’t believe me, look into stock options.