January 7, 2009
Why don’t investors see how easy it is to trade stocks for huge profits?
Stockwillrise asked:
I just don’t understand why so many are losing big money trying to make money in stocks. This year i am making huge profits in the stock market buying call and put options. This market is so easy to make money in but every where i see people losing money and panicking.
I just don’t understand why so many are losing big money trying to make money in stocks. This year i am making huge profits in the stock market buying call and put options. This market is so easy to make money in but every where i see people losing money and panicking.
Filed under Investing by Administrator
Comments on Why don’t investors see how easy it is to trade stocks for huge profits? »
Because you are just getting lucky.
Options are a way to hedge your risk. But, they can pose significantly more risk than trading stocks.
If you are just buying puts or calls, you might as well go to the craps or roulette table… or buy a lottery ticket.
The analogy that I use: Options are like using a table saw. It’s the right tool for certain jobs… and anyone can run down to Home Depot and buy themselves a Delta Machinery 3 HP Left Tilt Unisaw with Biesemeyer Fence (a really good table saw). Plug it in to the wall and rip away! But, if you don’t know what you’re doing, sooner or later, you’re going to lose some fingers.
Buying puts and calls is only part the story. To be effectively profitable you need to combine BUYING puts and calls with stock and SELLING puts and calls.
Options values change for more reasons than stocks going up or down. You can buy a call, have the stock go up, and lose money. You can also buy a put, have the stock go down, and lose money.
If you don’t understand theta and vega risk, you better be very careful… or, sooner or later, you’re going to have a few less fingers.
** Buy the way, just today I watched a friend’s “put” trade on Apple go from a value of over $70,000 to $8,000 in just a matter of few hours. Can you handle that sort of risk?