Options and risk management?

Question

Has anyone here had actual options investment experience...i.e. positive/profitable experience and you are not trying to sell a "system"/software/book, etc? What is the best strategy to reduce risk? Does it work? How do you do it, i.e. invest in options and stay profitable? Do you invest yourself or through a broker?

Answer 1

The lowest risk option strategy is to sell covered calls. With this strategy you can earn extra income on stocks that you are currently holding. It works like this...

Say you own 500 shares of XYZ and you bought them at 50. If you think the stock will stay around 50 you can sell 5 calls for XYZ. There's many different strike prices to choose from and many expiration dates. The longer time period out, you will receive a higher premium. I like to sell the next months call at a strike price at 50 or above.

Say it's the 3rd Friday in May. You can sell the June 50calls at say, 0.75. That means is you sell 5 calls you'll get paid 5*100*0.75 or $375.00 to give someone the right to buy your 500 share of XYZ on or before the expiration date of th 3rd Friday in June. (Options always expire on the 3rd week of the month). If XYZ stays at 50 or below, the option expires worthless and you keep the $375 and your 500 shares of stock and you can do the same process for the next month. As soon as the covered calls are sold, the monies show up in you brokerage account.

By the way, this doesn't consider broker fees. My broker charges $8 + 0.75 per option, so to sell the 5 options of XYZ, it costs $11.75.

There are many strategies, but this is by far the least risk.

If your interested, the best explanation of option straegies i've found is in a book, "Getting Started in Options", by Michael C. Thomsett. I found a copy on eBay for about $5.
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Answer 2

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Yes, I have traded options on and off for decades, but never very actively.

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I am not sure exactly what you mean. If you really mean "reduce" there has to be a starting point from which you make a reduction, but you did not specify what that starting point is.

If you mean "control" risk, the first thing you need is a good understanding of what the risk factors are when trading options. You can get that from reading from a good book on options. Second, you need to understand what the different strategies commonly used are, and when each on is appropriate. Once again, you should be able to learn this from a good book on options. Third, you need to undersand how to control the risk if the trade goes against you after you open it. Usually this is common sense if you undestand the risk factor.

To choose the best strategy you need to have a prediction about the direction and volatility of the underlying. The one strategy I have seen most widely promoted recently is an iron condor when you believe implied volatility is too high, but any low delta (delta-neutral) strategy is likely to make money.

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Delta neutral strategies, including the iron condor, try to benefit based on projections future volatility of the underlying at least as much as the direction it will go.

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I decide what trades to make but, obviously, submit those trades through a broker.

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I'll add one more comment. Previous answers to this question have recommended covered calls. You should understand that a covered call has the same risk profile as a cash-secured naked put, and few people consider naked puts as a low risk strategy.

Answer 3

option investing comes with strategies intended to reduce risks of investing
i will describe a few, you should read some text to find more.
1 covered call. if you own a stock you can sell short this stock and get an income from it. your (option) risk that the value of the option will increase is covered by the fact that you own the stock that will increase simultaneously. (in fact the share will gain more cents then the option)
other strategies to use options in order to reduce risks are to buy call option on the stock that you are interested and invest the amount of the strike price in bonds, this way you limit your risk to the amount invested in buying the option (not the bond). mind that the value of an option decreases with the passage of time if all the other parameters of the option are kept constant.

Answer 4

you still need an opinion as to direction or volatility of a security of a stock. Buy writes are generally very risk adverse strategies. You need you use a broker since you cannot execute the options yourself.

Answer 5

I can show you how to make lots of money trading opionts. Just send by $$$$$$$$ No. You can't just go "aaaa, how do I trade options". That's like saying "How do I build a house". Trading is a skill that has to be learned, and most people loss their money. Unless you've studied and learned about, it's a gamble. You would do better in Las Vegas.