Is Options Trading Right for You?

When it comes to personal investing, leverage is a poison. In 2008, I used to trade stocks on leverage and ended up losing a lot of money when the market turned. Trading on borrowed money is the worst thing one can do financially. Options is a fancy name of doing the same. People are often attracted by the promises of limited downside and multiple upside. In reality, whatever money you put to any financial instrument, you can loose. With options, there is often a time frame over which you will lose your money. All of it, when you buy a call or a put option. Unless do understand the intrinsic details of how the option pricing, volatility and greeks work, I strongly recommend you stay away from options.

The only strategy that can work with options is selling calls on the stocks you own. Never sell naked calls (without owning a stock), that presents unlimited downside for you. When you own the stocks, by selling a call option you can earn a premium and enhance the yield of that stock. If you are fairly confident that the stock can't go up in price and want to enhance the yield, this can be a good strategy. The downside is you might end up having to sell that stock position. With stalwarts (Peter Lynch's definition of stocks growing at 10-12% and paying decent dividends), this strategy could work once stock has had a good run up and looks overvalued and yields have come down as a result. Earning a call premium enhances annual yield on this stock position.

Before entering such trades however, I strongly recommend  getting a thorough understanding on options. I am going to rarely do any options trade in my portfolio. I have some experience with options and might discuss the strategy when applicable. Always remember that options are highly leveraged instruments. And leverage is poison!