Someone sent me this nice summary the other day on options trading…sums it up my options trading strategy nicely

behind the “risky” label that stock options have erroneously been given. With the right options trading strategy things can be very different.

If you ask many stock-market investors what they know about stock options, you’ll get the same answer:

“They’re risky.”

Like most wives’ tales, there’s a shred of truth, mixed in with gross generalizations, behind the “risky” label that stock options have erroneously been given. With the right options trading strategy things can be very different.

For example, you must have heard the comment: “Most (upward of 90%) option contracts expire worthless.”

Well, that’s one completely false generalization that’s used to persuade investors to NOT buy stock options.

In reality, the Chicago Board Options Exchange has shown that only about 30% of option contracts expire worthless. The 90% figure is misinformation that originally came from an SEC study that was fundamentally flawed.

Still, some investors choose to believe that 90% of options expire worthless (even though it’s a lie). These investors then think that selling option contracts is a better strategy… so that’s what they do, aiming to reap gains when the value of the contract goes to zero.

Yet, this can be a very risky strategy… one with unlimited risk. And it’s these “naked selling” option strategies that lead investors to believe another gross generalization…

That is: “My risk is UNLIMITED when trading options.”

If you choose to employ an options trading strategy that only purchases option contracts, that statement is completely false. In fact, buying an option contract is the ONLY way to guarantee you won’t take a loss more than you’re willing to accept at the onset of the investment.

You get a 100% guarantee that you cannot lose more money than you have invested in the contract. And since you can buy most option contracts for just a few hundred dollars (instead of a few thousand dollars, as with stock shares), you can play the market with only a small amount of capital and risk.

And the upside potential of our option plays is often much greater than 100%.

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