Why people mistrust options

When speaking to people regarding my options trading hobby, I get a lot of weird looks. They think that  I take on such a big risk and might loose one day everything. I do not deny that I take risk and that one day, I might have to buy a lot of stock.

In an attempt to clarify how I feel about option trading, I have put together a small slide show. Have a look and let me know what you think of it. Do you agree, or disagree? Do you see other reasons to trade or not to trade options?

As a next step, I plan to have some people sharing their experiences with option trading. The more info that gets shared, the better.

It is from reading a lot of blogs on passive investing, indexing, DGI and Financial independence that I decided to start the journey. By providing some answers to the most common questions, by sharing my own experience, by interviewing other people that trade option, by pointing people to other sources, I hope to contribute to a better understanding of options.

I look forward to your feedback and thoughts on this post and upcoming interview series.

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32 thoughts on “Why people mistrust options

  1. My husband and I don’t trade using options so I can’t tell you my experience. What I can say is that we all take risk without even knowing it. Even owning a home is a big risk but many people don’t see it that way. I am all for investing my money in things that pay me money to own them. Nice PowerPoint too.

    Liked by 1 person

  2. I like the slideshow approach. Thanks for sharing AT. I think that trading options is just different enough that it scares some people. Personally, I am thinking of expanding into this arena…..at least so far as selling puts on the companies I want to own anyway. We’ll see, but options can certainly be helpful for investors…….provided they know what they are doing

    -Bryan

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  3. I still haven’t really taken a good look at options yet. One of the things holding me back a bit is the minimum of 100 underlying units, for most shares the numbers get a big too big in case I get assigned vis-a-vis my typical monthly inlays.

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  4. We share common strategies. I only sell covered calls and cash secured puts. I do not trade with margin accounts. So the only money I lose is my own, not leveraged broker money. Slide 3, could use a bit more explaining I think. Please correct me if I’m wrong, but in that scenario, your downside risk is much higher than that of the stock owner. The owner can sell at anytime, but the put seller is stuck with the option. The stock could go all the way to let’s say $1, and the put seller in your scenario would have to buy $100 shares of the stock at $46. Of course there are ways to offload the option but that too will cost a lot of money.

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    1. We seem to have indeed a similar approach.
      Slide 3: The idea is that the owner of the option can always buy it back at a loss. It might be very likely that due to increased implied volatility, the option might be very expensive to buy back. I do think there should be a way out, cheaper than owning the stock.

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  5. the risk is bigger when I don’t understand. So, until here I assumed the risks of investment like buying an apartment in a known area. I think it is the same with the other people: they prefer to risk to keep the money in the house/current account because they trust.

    Thanks for the presentation! this will be helpful for me

    Liked by 1 person

  6. I have primarily seen options used in hedging, but I hadn’t thought much about trading options until I started following your site.

    Just like many areas in finance and investing, when you are unfamiliar you tend to be cautious. This is good and bad as it can keep you from making a big mistake, but I tend to be overly cautious.

    Your slideshow does a good job presenting the approach in an easy to follow format.

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  7. Slide deck is fancy !! Thanks…it was informative.

    For an investor aiming to develop passive income streams like me, options trading is way too active ☺ Mutual funds are very passive and suits my investment style and lack of time.

    But for active investors, the difference between investing in stocks and options may not be much in terms of analysis efforts. The difference I see is in time frame….options are probably more a short term investment.

    One issue I was wondering about was trading costs. Is there a per option trading cost?

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    1. Fair point: it is not really a passive income.
      On the tarding costs: this is broker dependent. A general rule is that you pay per contract, not per trade. When adding 3 contracts in a trade, you pay 3 times. With stock, it is very often amount based.

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  8. hey, awesome slide show!
    That is exactly what I am doing in trading options. selling cash secured puts und covered calls.
    I think most people are scary because they do not really know much about it. I understand that.
    But when you know what is to do, if the stock is running against you, there are so many opportunities for investors. 🙂

    Without Options I would reach my goal of financial independence so fast. With a approach of single dividend investments it will take me years longer.
    May is a difficult month, nevertheless I earn more options premium in this month than someone with much more cash in a bank account.

    thanks for the post!

    best regards

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    1. You bring a good point… it takes mor knowledge than regular stock. I will add that to the slides.

      My May month also is not as good as the months before… I might need to roll a lot… 😦

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  9. another issue from my part:
    – I don’t know where to buy.

    (or maybe this is in the area of – luck of know how)

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  10. Hey ATL, thanks for the slideshow and I appreciate you explaining what it is you do and your thoughts on it.

    It is not something I have ever considered, and I find it interesting that Investment Hunting, Income Surfer etc do it/are considering it.

    This definitely isn’t common among people in Australia. I think we (DDU) still always be sticking to dividend investing because it is truly passive once purchased, and we get paid dividends/profits regardless of whether the stock is a bit up or down.

    Thanks for sharing 🙂

    Tristan

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  11. Hi ATL! Nice write-up and summary. We have a similar approach with options on index futures (e-mini S&P 500 Futures). The income generation through option writing (naked puts in our case) makes a lot of sense in sideways moving markets as today. Index might be making very little progress, but we collect the option premium. What platform do you use? We use Interactive Brokers.

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  12. 2 more issues for me:
    – I don’t trust in my self control ( to decide to sell in the market and regret your purchases a couple of days) , or to give the proper time.

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