Commentary: Dangerous-looking tools can be used safely

Really make money on options

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    Even worse, some experts make it seem like you need a Ph.

    Pin1 3 Shares Options are a financial instrument that you can use for a number of different purposes: as protection against expected moves in an underlying instrument such as a stock; as a way to use leverage to control more of a stock than you want to buy outright; as a way to use your existing investments to earn additional cash; and many other uses.

    Investors keep close eye on Hollande Option myths probably started in when Dutch investors bought call options on exotic tulip bulbs. Some people made paper fortunes without ever taking possession of the beautiful bulbs.

    Options allow for potential profit during both volatile times, and when the market is quiet or less volatile. When you sell an option, the most you can profit is the price of the premium collected, but often there is unlimited downside potential. When you purchase an option, your upside can be unlimited and the most you can lose is the cost of the options premium. Depending on the options strategy employed, an individual stands to profit from any number of market conditions from bull and bear to sideways markets. Options spreads tend to cap both potential profits as well as losses.

    When tulip prices collapsed a few years later, so did the Dutch economy, and the once valuable options became worthless. Many investors blamed options for their losses.

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    The real risk is with the options trader. Myth 2: Options are difficult to understand Options by themselves are not difficult to understand. Basically, you have the right to really make money on options or sell an underlying stock at a designated price.

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    Even better, there are only two options: a call and a put, and you can either buy or sell. Also, the timing is difficult.

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    Options have a limited lifetime, and once they expire, they are worthless, so your stock has to move in your direction quickly. If it were that easy to make a profit trading options, then everyone would be rich.

    They are attempting to turn a small amount of money into a huge windfall.

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    Because the options are out-of-the-money, the time remaining before the options expire becomes critical. The stock must make its move before expiration for them to work in your favor.

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    On the other hand, selling covered calls reduces risk because you already own the stock. And if the stock tumbles, the covered call owner loses less than the stockholder.

    After all, another myth is that someone has a secret. The only secret to making profits in the options market is hard work, discipline, having a plan, and learning how to accurately price options.

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    Michael Sincere www. More On MarketWatch.

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