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The Options Market: Overcome Your Fear And Embrace These Lucrative Instruments

Tuesday, July 7, 2009
by Karim Rahemtulla, Investment Director, Smart Profits Report

Stock market-wise, I wish we were back in July 2008.

At that time, a 1% swing in the market was an anomaly. Today, it’s the norm. And even though we’ve seen volatility calm down somewhat in recent weeks, don’t be fooled. As we enter another earnings season, we’ll see volatility pick up again.

So what are you going to do?

Paralysis is not an option. Neither is making 1% or less on your cash every year when there is a high probability of out-of-control inflation in the years ahead.

You need to have a plan that can take advantage of what the market offers. And simply put, that means employing strategies that work both the long and short sides…

Expand Your Investment Horizons

Until recently, most investors have feared executing anything but the most basic investment strategies: Buying stocks, trading stocks, and in many cases, just buying and holding stocks.

While there’s nothing wrong with any of those moneymaking methods, they only scratch the surface of what the market really has to offer.

And in an increasingly complex and volatile market, there’s no better time to expand your horizons and learn how to execute the strategies that can enhance your returns, protect your portfolio and get you excited you about investing, rather than fearful.

Are Options Dangerous?

My specialty is options.

When I mention that to people, I’ll often get a rolling of eyes, or some kind of, “Wow, that’s kind of risky, isn’t it?” reaction.

Are options “dangerous” investments?

Well, any investment is dangerous if you don’t understand it. Even having money in a CD can be a painful experience when interest rates are rising and you’re locked into 2% for five years. Just ask those who locked up their money at 8% in U.S. Treasuries in the mid 1970s, only to watch rates eclipse 18%.

So options can be dangerous… if you don’t know what you’re doing. Then again, investing in Worldcom, Enron, WAMU, Fannie Mae and General Motors was dangerous, too.

And if you don’t take the time to learn how options work and what’s happening with your money when you use them, options most likely will prove dangerous for you.

The people who lose money in the options markets are the ones who view it like Vegas on Wall Street. They use options to gamble. But options aren’t weapons of financial destruction. They are, in fact, the opposite…

A Barrage Of Options Benefits

I’ve spent years telling people that far from being scary, options are very efficient instruments that allow you to control your money like no other tool on the market today.

Many investors have realized that once you do your homework, options make you a smarter investor, less dependent on the market’s vagaries and whims.

Among their benefits, options allow you to…

  • Buy stocks for less than their current prices… or get paid for the effort.
  • Protect your downside by offering insurance against downward movement in price.
  • Generate greater income than dividends from your current holdings.
  • Control stocks and benefit from their movement, while using significantly less capital to do so and giving you the luxury of more time for the situation to work in your favor.
  • Play both sides of the market or a stock simultaneously for potentially unlimited gains.

So why do people think options are dangerous?

To answer this question we must take a look at the other side of the trade…

Winning Without Gambling

For every option seller, there is a buyer.

For every covered call, put-sell, straddle, strangle, etc, there has to be a counter-party. Most of the time, you don’t want to be in this position.

These are the gambling types I mentioned a moment ago. In their eyes, options represent a lotto ticket to fortune. The chance of winning the lotto in a state like Florida is one in 18 million. But that doesn’t stop people from buying tickets. The losers in the options market adopt the “you can’t win if you don’t buy a ticket” mentality, giving the entire subject a bad name.

But you don’t have to join them. Instead you can execute proven strategies that work - and work well in any type of market, especially volatile ones. Over the next few weeks, I’ll explore several strategies in-depth (a mini-workshop if you will), so stay tuned, Meantime, feel free to browse our archives to get a head-start.
Karim Rahemtulla

P.S.

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Disclosure: No positions