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May 28,
2010
Basic
Option Strategies for Rookies
Most
people adopt an attitude that tells them
that investing and accumulating wealth is easy.
Investment club members have the advantage of entering
investing with
the point of view that investment education is important.
I’ll continue on that path by explaining what
an option is and how an option works before we consider making a trade.
That’s
especially true with options because they have characteristics that are
far
different from other investment vehicles.
Limited lifetime is one that is immediately obvious. Thus, it’s important not to get ahead of
yourselves when preparing to trade options.
If you are fortunate enough to be in a club with
experienced option
traders, you have people with whom you can discuss any questions that
arise via
these posts. And if you have no such
person, please feel free to send questions to me: know_your_options@bivio.com
Today, I’d
like to take a jump ahead and tell
you a bit about some of the strategies that I’ll be recommending. However, the basics come first and I hope you
have the patience to wait before beginning to trade. I
have no way to know the knowledge level of
most readers, but a preliminary poll requested that I start at the
beginning. I’ll do that, beginning with
the next post.
This
introduction is offered to provide some
insight on what lies ahead. Next week I
plan to get down to basics and help you learn how options work. I’m hoping to receive feedback between now
and then to give me an idea of what topics you want to see covered.
I thank
those who already participated in the
initial
poll.
Except for
a special situation in which you prefer to own shares
of stock, all
recommended strategies are going to have one characteristic in common:
limited
risk. I will discourage you from taking
unlimited risk. In fact, managing risk
is going to be a recurring theme in my contributions.
To limit
risk, every time one option is sold,
another is bought. That means we are
going to be concentrating on ‘spreads.’
A spread is nothing more than a position of two (or more)
options as
opposed to a single option.
I will
discourage purchasing options as a
speculative play, but will recommend buying a certain type of call
option as a
replacement for buying stock. Because
investment clubs always buy stock, this is a method you will be able to
consider using.
But first
things first and it’s time to begin
at the beginning. Next Monday.
Mark D Wolfinger
Expiring Monthly: The Option Traders Journal
http://www.expiringmonthly.com/
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