Options Myths. Presented By:
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1 Options Myths Presented By:
2 Options Myths Options involve risks and are not suitable for all investors. Prior to buying or selling options, an investor must receive a copy of Characteristics and Risks of Standardized Options. Copies may be obtained by contacting your broker or The Options Industry Council at One North Wacker Drive, Chicago, IL In order to simplify the computations, commissions, fees, margin interest and taxes have not been included in the examples used in these materials. These costs will impact the outcome of all stock and options transactions and must be considered prior to entering into any transactions. Investors should consult their tax advisor about any potential tax consequences. Any strategies discussed, including examples using actual securities and price data, are strictly for illustrative and educational purposes only and are not to be construed as an endorsement, recommendation, or solicitation to buy or sell securities. Past performance is not a guarantee of future results. This presentation should not be construed as an endorsement or an indication by FIA or OIC of the value of any product or service described in this presentation.
3 Options Myths Understand limitations/applications Risks Education is key success comes from hard work Pricing Position management Trading plans You are not alone OIC, brokerage firms, books In this case help is only a phone call away (1-888-OPTIONS)
4 Educational Resources The Options Industry Council OPTIONS Help Desk Brokerage Firms Online On the phone
5 The Myths
6 Myth #1 Selling options is the best way to make money since 90% of options expire worthless statistics* show: 35% expire worthless 17% are exercised 48% are closed prior to expiration Knowing risks/rewards Understanding strategies and having trading objectives (realistic expectation) are of utmost importance * Source: The Options Clearing Corporation
7 Myth #2 Being assigned is bad! It depends What were your objectives? Selling a stock at a higher strike price? Buying the stock at a target price?
8 Myth #3 Buy low-priced options because they re cheaper. Low-priced options usually have greatest potential of expiring worthless Consider the risk/reward of high leverage Consider what needs to occur to profit from a leveraged (or out-of-the-money) position Your forecast and timeframe are key drivers
9 Myth #4 Options are short-term; impossible to forecast for short-term! LEAPS - Long-term Equity Anticipation Securities LEAPS cover 475+ stocks, ETFs and indexes Their time until expiration goes out as far as 31 months Options also available for 6-8 month periods
10 Myth #5 Options are for gamblers and high-risk takers. There are many options strategies for the conservative investor Some options strategies are more conservative than only owning the stock by itself How conservative was owning Enron without owning put options?
11 Myth #6 Options are too risky! Options allow you to: Limit your risk to the amount of the premium invested Hedge with little capital outlay compared to alternatives Trade with lower capital outlay than stocks Have choices by choosing your time period, strike prices, etc. Trade in bullish, bearish and neutral market conditions
12 Myth #7 I bought a put option to protect my stock and it expired worthless I wasted money! Was the protective put cost worth the peace of mind? Do you feel the same way when your house doesn t burn down and you ve purchased insurance? Ways to offset hedging costs = Collar
13 Myth #8 Options are bad for the markets. Professionals making markets provide liquidity Professionals provide bid-offers to off-floor investors Options allow investors to enhance their stock portfolio: Increase income Reduce downside risk Reduce overall portfolio volatility
14 Myth #9 Sellers are smarter than buyers. If your forecast is wrong, being a seller may not help you In a bullish market, buying calls may be very profitable In a bearish market, buying puts may be very profitable Very important to know forecasts and goals and match to appropriate options strategy
15 Myth #10 It s better to buy calls than puts, since the market is more up than down over time. Must have a forecast for the underlying security and market Strategy must conform to that forecast Can utilize puts or calls to set that strategy
16 Myth #11 Nobody exercises options before expiration. Early assignment risk is negligible. Early exercise can take place close to expiration (17%) Early exercise may occur due to: Dividend considerations Time value give-up considerations In-the-money and near parity with time value gone
17 Myth #12 Options are a zero-sum game. Market-makers and investors have: Different objectives Different outcomes Different position management techniques and goals Different ways to manage risk by hedging with stock, futures
18 Myth #13 The commissions and spreads on options are too excessive to make any profits. Choose strategies and targets that allow for profits Shop around for commission rates What are your needs? Don t overtrade place a trade or implement a strategy that you believe has a high probability of success Market competition has narrowed the spread on most options prices The longer out you go, the wider the spread may become
19 Myth #14 Options are too expensive the exchanges are charging too much! An exchange is a marketplace for buyers and sellers Exchanges do not charge the customer for any trade The marketplace is efficient options pricing factors (volatility, time to expiration, underlying price, strike price interest rates) set the stage at the end of the day however Supply and demand will exert its influence If you think the options are expensive consider strategies that involve selling premium
20 Myth #15 Limit Orders are better than Market Orders. You may never get filled Your stock may hit your forecast price and you weren t in because you held out for a mere nickel or dime
21 Myth #16 If I buy an option and the stock doesn t move, I lose all of my money. Risk is limited to premium paid Apply good portfolio management methods Partial premium might be recouped by closing position before expiration Consider roll-out and buying more time if stock doesn t move Have a stop-loss both for price and time Opinion vs. Money
22 Myth #17 Stock and index options are the same. Equity options are American style; can exercise at any time up until expiration Index options settle in cash Most index options are European style exercise; can t exercise anytime before expiration Equity options expire with the underlying security
23 Myth #18 Covered writing is good because most options expire worthless. There must be objective goals for covered writing Outperform in a sideways market Sell stock at a target price Limited downside protection
24 Myth #19 Covered writing forces you to sell your winners and keep your losers. Investing requires active management Stocks no longer fitting your objectives should be sold If an assignment occurs, you can repurchase the stock if you are still bullish or view the stock as positive
25 Myth #20 I m doing a covered write the larger the premium, the better! The markets are efficient so that high premium may point to higher risk and volatility
26 Myth #21 Covered writing underperforms. Does covered writing outperform in sideways markets? Know your objectives Are you looking for: Downside protection? A target price? Income? Use the strategy that fits your goals and forecasts
27 Myth #22 I sold a covered call and since then the stock is up I m losing money on the call. Understand the strategy realistic expectations Remember why you sold the call and what were your objectives The call will increase in value as the underlying increases
28 Myth #23 I sold a call against a stock I own and the stock went down and I lost money these options don t work! Understand the strategy Why did you sell the call? Income? Reduce downside risk? Risk is the stock in covered calls options actually helped Stock going down time to perhaps lose the stock
29 1-888-OPTIONS
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