My brother got me interested in trading options more than a decade ago. I had some disposable income and had expressed interest. He walked me through placing my first trade. I asked tons of questions and then wrote out a little script. Back then, most of us still traded with traditional brokers, so I had to know how to call in the order, and I also wanted to be prepared with any questions I thought the broker might ask me.
Unluckily for us, that first trade was wildly profitable.
Why was that unlucky? It was a risky trade, and, because I profited wildly, I could have elected to continue with risky behavior, perhaps risking more money than I should have. Luckily for me, I didn't put at risk anything other than some disposable income until after I had been through some rough market conditions and educated myself a bit more.
Even from the first, I had been skeptical enough that when I was quizzing my brother, I had asked, "Why buy a call option that expires? Why not just buy the stock?" Leverage was the answer my brother gave me, and that was the answer I gave my broker when he asked the same question. When others ask why options, we can also answer that options provide us with the ability to trade both directions or to hedge positions we already own against a loss if the underlying moves too far in either direction.
With that leverage comes a couple of costs, and one of those cost is that we're buying a decaying entity. To profit from a directional option trade, the underlying has to move in the preferred direction fast enough that the price-related gains outstrip the time-related decay. The option seller benefits from that time-related decay. To profit from a non-directional options trade, the underlying has to stay in a certain range and volatilities have to behave, too, long enough for time-related decay to bring the trade to profit. It took me and takes some others a good deal of time to figure out how volatility impacts options prices, too.
Another answer to the "why options" question lies in the flexibility of options. We can trade directional or non-directional strategies. Among the directional trades, we can trade straight calls and puts, debit spread, credit spreads, ratio spreads and other trades. Non-directional trades benefit when the underlying's price remains within a certain range from the time that the trade is opened until it's closed or at expiration. Under the Option Investor umbrella, you'll find many different types of trade ideas, some meant for one type of market environment or trader preference; some for another.
With that flexibility comes a different cost: complexity. It's just not as easy as it might have seemed after that first wildly profitable trade, although even then I was skeptical. Employing all these different strategies requires us to spend some time educating ourselves. If you've decided you'd like to try some of the trade ideas on these pages, you'll often find a description of the trade ideas. Read those descriptions so you understand what the risks and gains might be and how the trades will be set up in the particular newsletter under the Option Investor umbrella. Spend some time with archived articles from that newsletter, following trade suggestions through and seeing how they played out. Were they adjusted and did additional monies need to be kept available for such adjustments? Read archived Options 101 and Trader's Corner articles, too, picking up tips from those who have written those articles over the years. Please do remember, however, that market environments change and ideas that might have been appropriate in 2005 or 2006's trading environment might not be workable in today's environment. We used to tell readers that one of the benefits of trading the indices over individual equities was that indices didn't gap in the mornings the way equities sometimes did. That is obviously not true any longer. Some individual equities are better behaved than the indices these days, although the trade would be subject to extra risk from an adverse headline involving that equity.
However, if you're new to options trading or moving up the complexity scale when you choose trades, you may desire more comprehensive education that moves from A to Z in a smooth manner. Where can you get it? A search through an online bookstore can turn up dozens of volumes on many aspects of options trading, but those books tend to be expensive. You can often find basic information free. The CBOE and other exchanges offer such information. So does the Options Industry Council (OIC), found at www.optionseducation.org. The OIC's classes are grouped in Beginner, Intermediate and Advanced. Maybe you've been trading straight calls in the speculative part of your portfolio and covered calls in the long-term part of your portfolio, and you understand something about options, their pricing, and expiration considerations. You feel ready to tackle more complex options positions. The advanced classes might be better for you. If you're just getting started, the beginner classes might be necessary, even if somewhat more boring! I know you all want to get right to the good stuff: how you make money. Not losing too much money is far more important to your eventual profit-and-loss sheets than making money, however, and that should be your first priority as you learn.
Don't like to read through lessons? Most of the sites have webcasts or podcasts. If you're not interested enough to invest some time in these, you may not be ready to trade options.
I like these sites because their emphasis is on education, as has been Option Investor's from its inception. Anyone who tells you that you're not going to lose money learning to trade options is lying to you. You're going to pay a tuition to learn to do this, and it's your job not to pay too high a tuition. Take advantage of these free educational programs!