I am amazed at how many investors have no idea about what Options really are. Many continue to provide the argument on how Options Trading is very risky…I would have to disagree as Options Trading is safer than just trading stocks. Now hold on a minute and let me explain. You are correct in that Options Trading does have risks. But, so does any strategy used in the Stock Market as no one knows what the stock will be in the future. So, let’s say you purchase stock in DELL so you are looking for an increase in value so that your investment increases. Now, what happens if DELL drops in price? Your portfolio value drops along with DELL. A $5.00 drop in stock price and you will be down $500 on your investment in DELL.

What would I have done differently? Let’s say I match your investment in DELL and purchase 100 shares as you have done. I however would sell a call again DELL ( in other words, sell someone the option to purchase my shares from me at a fixed price above what I paid for the stock) other wise know as a Covered Call. For selling these calls I would immediately receive $100 (or $1 per share for such a call sale).

Time to compare situations…your account value would be down $500 but mine would only be down $400. Therefore, I have effectively provided some downside protection while also reducing my per share cost in DELL. I would be able to do this every month to generate income and at some point I could exit DELL with a profit even though it never gained a penny in value while you on the other had would still be down $500. Now…does Options Trading seem as risky as you first thought?

Covered Calls are just one of the many option trading strategies I use in trading the Stock Market. Although Options Trading does involve risk there are ways in which they greatly help to reduce the risks of trading. Therefore, make sure you have a good understanding of any trading strategy before you invest your money.