Options trading: for years it’s been seen as the black sheep of investing. Too complex, too risky and too confusing for average investors to use. And, it’s not surprising this misperception has existed for so long. Even young children can recite the mantra, “Buy low, sell high.” With that in mind, buying when stock prices are high and selling when they are low seems counter to the most basic investing principle. Yet this is often precisely what is required to insure a portfolio against wealth destruction.
Despite what many believe, options were introduced to the market as a way to hedge risk. In today’s investing environment, by choosing to trade options, in conjunction with stocks, investors are able to tailor their investment preferences appropriate to their risk tolerance and reward objectives. In laymen’s terms, investors are able to retain control over their finances and gain the flexibility needed to profitably buy and sell during all types of market trend because options can act as protection in down markets and as a hedge in up markets, augmenting chances of success. Unlike traditional stock investing where investors only benefit financially when stocks increase in value, options trading provides investors with the opportunity to increase portfolio value even if stock prices drop – a valuable benefit in down markets, such as the 2007-9 bear market.
Over the past decade, as investors struggled to squeeze out gains in the major indices like the S&P 500 and Dow Jones, growth in options trading steadily increased. The bottom line is simple: trading options in conjunction with stocks offers protection and hedging which can better insure portfolio value than directional stock investing during bear markets and stock market corrections. The growth and popularity of options validates the increased value of options. In 2000, there were five options exchanges and today there are nine. During that same time period, options trading volume has increased exponentially. In 2000, there were 726 million contracts. A decade later, that number exploded to 3.6 billion.
Regardless, the vast majority of individual investors remain skeptical of options, but why? Mainly, because there’s a lack of education. When described as colloquially as possible, the language and strategies of options trading are daunting, leaving no wonder why individuals have shied away from it in the past. But considering the widespread financial losses of the prior two bear markets, investors cannot afford to remain singularly-focused on the market indices. With the various software programs, webinars and training programs at the touch of the key, retail investors can easily teach themselves how to use options, protect their stock portfolios and generate income from existing stock holdings. As a result they discover how to manage risk and regain control of their finances, becoming empowered and able to protect their wealth during every market cycle. And to those investors, options no longer seem intimidating and perilous.
Trading options is like riding a bike. Without the proper training and practice, it’s dangerous. But, with the right skills, it can seem as natural and effortless as a Sunday afternoon bike ride.
Gareth Feighery is CEO and Co-Founder of MarketTamer, a stocks and options education company. Feighery has an MBA from the Wharton School at the University of Pennsylvania
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