Etrade put options
Founded in by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services. The promise of getting rich quick never goes out of style. Whether it's the latest side-business scheme or the perfect penny-stock pitch, many people are vulnerable to questionable and risky strategies that hold even the possibility of producing great wealth.
Unfortunately, even legitimate and useful tools to help people with their investing are prone to misuse, and recently, options trading has gotten a lot more attention, becoming a focal point for ordinary investors and the discount brokers that serve them. Let's take a look at why trading options is somewhat controversial and why you shouldn't just dismiss options out of hand. The search for more business An recent article in the New York Times highlighted a trend among brokerage companies, observing that some major brokers are talking about the benefits of options on stocks, ETFs, and indexes.
AMTD , and Charles Schwab NYSE: SCHW as advertising the rewards of options trading, noting that trading in options and other derivatives like futures contracts have made up an increasing part of brokerage firms' businesses.
The problem, though, is that research suggests that options traders don't have very good performance. One issue is that by their nature, options are generally short-term instruments, distracting investors from long-term trends and instead forcing them to assess probabilities of share-price movements over very short periods of time. Yet arguably, the bigger danger with options is using the extensive leverage they offer to take on too much risk.
Etrade option Level 2 (options trading, margin, trading, calls) - Investing -stocks, bonds, mutual funds, trading, market, brokers - City-Data Forum
Options are what you make of them Admittedly, options can produce amazing short-term profits if you use high-risk strategies and have perfect timing. The psychological impact of those payouts when they come can tempt traders into always using high-risk strategies.
The Power of the Put Option | Education | E*TRADE Financial
That's a big part of the reason that options traders routinely lose money: They ignore the very real risk of losing everything by not controlling the amount they risk on a particular position. But high-risk strategies aren't the only way to use options. Often, you can use options to reduce the risk in your portfolio or to take on risks that you're already comfortable with.
For instance, if you want to hold on to a stock you own until it reaches a certain price but then plan to sell it, then writing a covered call allows you to receive a premium that you wouldn't get from simply setting a limit sell order. Similarly, if you know you want to buy a stock if it drops to a certain price, then writing put options can similarly pay you a premium and result in your getting that stock at the price you choose -- again, a better result than simply setting a lowball limit buy order.
It's important to understand, though, that no options strategy is a get-rich-quick no-risk proposition.
Even with writing puts and calls, the risk is that you commit yourself to buy or sell shares at a certain price. For instance, if you write a put and the stock falls even further than you'd expected , then you're giving up the chance of potentially buying those shares even more cheaply.
Similarly, with covered calls, the premium you receive compensates you for the fact that you're giving up any potential profit above the exercise price of the option.
Should you use options? In the end, options are another investing tool that can be useful to control risk in some situations.
Plenty of investors have become wealthy without ever touching the options market, while others get a lot of value from the sophisticated strategies that options can offer. The key, though, is that if you decide to use options, be sure you know what you're doing and understand the pitfalls that can result from common mistakes.
Why So Many Investors Lose With Options -- The Motley Fool
Otherwise, you'll find yourself in a high-stakes poker game where the odds are decidedly against you. Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance. You can follow him on Twitter DanCaplinger.
Fool contributor Dan Caplinger has no position in any stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Dan Caplinger has been a contract writer for the Motley Fool since As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world. Skip to main content The Motley Fool Fool. Premium Advice Help Fool Answers Contact Us Login.
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