Option Trading - Do you do it?

[cruiser]

As an average investor, I invest in mutual funds and a few stocks. I like to go with ones that pay good dividends and have been fortunate that my results have been satisfactory.

One area of investing that I haven't done much with is options. I'm starting to read up to learn more through various websites as I want to expand knowledge in this area. When I have purchased stocks up till now, I buy them at one price, hold onto them for a period of time and then hopefully sell them for a profit!

I'm thinking of looking at options however know nothing about them. I'm sure that there are lots out there who play the market using options. How have you done and is it worth the risk?

Would you mind sharing your experience (in layman terms) if options are worth looking at. Of course, the number one rule of investing is to play with money that you can afford to lose. I'm getting the impression that options multiply that rule.

Appreciate any feedback.

thanks,
Cruiser

 

[steverino]

One thing to consider is selling covered call options. That means you sell options on stock you own. For example if you own 500 shares of CN and you bought them for $85, you could sell options $90 options 6 months out and pick up around $1.50 a share. So you would get $650 and someone has the option of buying your shares for $90 for the next 6 months. If the price stays below $90 the options won't be exercised and you could sell them again. If the stock goes above $90 you would lose some in that they can be bought for $90. The covered call option provides some income but lowers your upside potential. I have been doing this for a long time and it has worked quite well. This is just one strategy.

 

[cruiser]

One thing to consider is selling covered call options. That means you sell options on stock you own. For example if you own 500 shares of CN and you bought them for $85, you could sell options $90 options 6 months out and pick up around $1.50 a share. So you would get $650 and someone has the option of buying your shares for $90 for the next 6 months. If the price stays below $90 the options won't be exercised and you could sell them again. If the stock goes above $90 you would lose some in that they can be bought for $90. The covered call option provides some income but lowers your upside potential. I have been doing this for a long time and it has worked quite well. This is just one strategy.

Thanks for the idea....as I'm new to options, I am looking at all of the possible scenarios...

I take it that you would be using a discount brokerage for doing options (vs going through an investment advisor). I find on the discount side that the people on the phone don't give out any advice and you have to know what you are doing.....

 

[steverino]

You need to know what you are doing, so may need more service early on.

 

[newton man]

Steverino has the right idea for you. selling covered calls is the safest and the simplest thing you could do. The other strategies are usually too costly (commissions) or too risky (naked calls/puts). And yes, use a discount brokerage. One more thing for you to consider. Don't buy mutual funds. If you want diversity, buy ETF because the annual management fee is much much cheaper than mutual funds. Good luck.

 

[InTheBum]

I do option trades through ETFs. Meaning, I let a pro take care of it, and I collect the money.

 

[bcneil]

I've been using interactive brokers for the last few months and really recommend them.
Cheapest for everything, trades, margin loans.....

As strange as this sounds, one of the best place to learn different option strategies is YouTube.

 

[rafterman]

Yeah agree with other posters that covered call writing is a good strategy to enhance yield. Works well in sideways or declining markets but risk is you lose upside on the stock if it moves above the strike price. You can also buy calls or puts if you are bullish or bearish on the underlying stock or index. This is a high risk strategy in the sense if your option expires out of the money then it's worthless and you lose the whole premium you paid but if you are right you get potentially a much higher return or leverage to the underlying asset. I have a pretty good book in the "For Dummies" series that starts with the fundamentals of option trading and moves to advanced strategies using combination plays. Have to admit have never pulled the trigger and don't have the appetite for anything but the most plain jane vanilla type option i.e. selling covered calls. They also have a couple of regular guests on the BNN channel who specialise in options and provide recommendations. Most of the content is on their website if you google it and search around.

 

[cruiser]

I will google Covered Calls as an area to learn more about....

I have talked to a few different people about ETF's but haven't jumped on board yet....