Options offer, well, a lot of options. They are the most dangerous part of the market. They involve the world of derivates and pure gambling.
Those who believe they can only make money in a bull market are wrong. Not only you can loose big and it’s easier to do so due to an inflated ego and unrealistic valuations mixed with trading options, it’s a waste of your time, energy and mental capacity.
Options are the right to buy or sell an asset in the future at a predetermined price. You’re not obligated to purchase the asset, but you have the right.
An underlying security is an asset in which derivatives (futures ETFs and options) are based. Options must be used before their expiration date.
The strike price is the predetermined price at which you buy (in the case of a call) or you sell (in the case of a put).
These are speculating short-term actions with securities a.k.a casino gambling.
Securities are stocks, bonds, ETFs, commodities, REITS and mutual funds traded on the stock market in which options can take part in.
Passive investing tends to be seen as boring but in fact it’s for the smart folks who actually want to earn more in the long run and do less work.
Bottom-up investing is for those with limited attention spans who believe they can get rich quick although it’s extremely rare through active investing which involves options.
The things that will make you rich in the short term:
-Gambling in las Vegas
-Active trading (80%+) loose money though
-Going viral on social media
Long term all of them fade and passive investing stays.
Options 101
Put vs Call
Put: Right to sell the securities
Call: Right to buy the securities
Put Option
You buy put options when you believe the value of the stock will decrease. The predetermined price is called the ‘strike price’.
The potential loss on a put option is the premium paid and the potential gain is limited because the value can’t go below zero. Unlike shorting, where the possible loss is unlimited, a put option expires as soon as the asset’s value rises above the strike price.
Call Option
As the opposite, you believe a stock will increase in price in the future. Your profit is the difference between the strike price and the actual price. The potential loss on a call option is the premium paid. The potential gain is unlimited.
Pros
Leverage
More risk = more reward or the reverse
Hedging
Anything in the stock market is a hedge against inflation along with real estate. Cash is the worst inflation hedger.
Hedging is a strategy to take an opposite stance on a security to minimize your potential losses.
Protective put
Investors can use options to cover their risks by longing (bullish on) an asset and wants to decrease their risk from a market crash, they can purchase a number of put options on the underlying asset.
This protects the investor from a pitfall since if the stock increases past the strike price, the investor loses the premium they paid.
Cons
Too Much Risk
Options is pure gambling. Better to invest in low-cost index funds and ETFs to earn steady consistent returns through long term monitoring larger indexes such as the S&P 500 or Dow Jones that always go up over time than waste your time day trading away without a crystal ball.
Alone
For most of the part, it’s all solo. Sure you can be a part of a Reddit trading frenzy group chat but this is your hard earned money on the line and listening to others isn’t always the smartest move. You’ll quickly realize that there are many traders that like to pretend they know a lot.
Wasted Time
Gambling takes a lot of effort monitoring trades from 9:30–4pm ET, reading reports roughly for 2 hours before and after the market closes and opens, understanding what to parse out from social media, how to come up with a new game plan every time quarterly earnings come out and what not to listen to on social media.
Relieve yourself some headache, wasted time, money and take the easy slow route of building real wealth through real estate, moderate approach to passive investing, REITs, foreign investments and alternative income sources you can read about here that aren’t related to the craziness of the market.
Although everyone should take part in the best inflation hedge of all time (the market) to profit off of trillion-dollar behemoths and be a part of the action, it isn’t for everyone especially those who want to maintain their mental sanity.