Can any one who is knowledgeable in buying options tell me were to start or if profitable?

Answer 1

From personal experience and many things I've read, I believe that SELLING options is more profitable than buying them. But I would only recommend selling covered call options (which means you own the related stock) and sell someone else the option to buy it from you at a certain price.

The reason that selling works better is that to profit from an option you buy you have to be right about BOTH price and time. For example, if ABC stock is selling for $45 in April and you buy a June $50 call option for $2, you'll only come out ahead if the price of ABC stock goes up above $52 (the $2 you paid for the option plus the $50 you have to pay to buy the stock itself) - AND it has to do that before the third Friday in June. Even if you're right that the stock is going up, if it doesn't get to $52 until the fourth week of June, you lose money.

On the other hand, the seller (writer) of the option profits if the stock doesn't go up to $52 OR it doesn't get there by the time the option expires. The odds tend to favor the writer of the option.

The reason you don't want to write a call option unless you own the stock is that if the stock goes way up (due to a buyout, great earnings, a highly successful trial of one of its drug candidates, etc.), you can lose a lot of money. Let's say you sold that June $50 call for $2. Since each call represents 100 shares of stock, you got $200 (minus commissions). Then ABC announces great news and the stock soars to $70 and the buyer of the call exercises it. If you don't already own the stock, you have to buy it for $70 a share ($7000) and then sell it for $50 a share ($5000), so you lose about $1800. (The $7000 it cost to buy it minus the $5000 you sold it for minus the $200 you got for the option.)

Be careful about what options you sell this way, though. The tax calculations can get VERY complicated. If the call is a "qualified covered call", it's not bad, but if it's not "qualified", you've probably established a "straddle" and the tax rules on that are extremely complex. Basically, if the strike price of the option is higher than the current price of the stock AND the expiration date of the option is more than 30 days away, it's probably a qualified covered call. Otherwise, it's not and you'll probably need an accountant to figure out the tax on it.

Answer 2

Where to start:

Learn about options. I suggest you start with with free on-line tutorials and classes at

http://www.cboe.com/LearnCenter/default.aspx

After you have finished those, read one or two good books about options. If you stick with the books listed at

http://www.cboe.com/Institutional/Bibliography.aspx

you can be confident they are good books. However, just because the content is good does not mean it is a good book for you. If it is written in a style you find difficult, you may not get much out of it. I suggest you try to review books at a large bookstore, a large libarary or at amazon.com to find one at your level in a style you like. For what it is worth, my favorites are

McMillan, Lawrence G.: Options as a Strategic Investment

Natenberg, Sheldon: Option Volatility and Pricing

Is it profitable:

For some yes, for others no. Option prices depend on a number of factors other than the price of the underlying. One factor that always works against option buyers is time since options are a wasting asset. In general option buyers can expect to lose money on most of the options they buy, but may make spectacular profits on a few trades.

Most (if not all) professional option trades both buy and sell options on the same underlying, creating spreads, which limits the risks involved.