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OPTIONS – THE RISK AND THE REWARD

by Uncle Bob Williams

What is it about options? This type of trading seems to be almost a dirty word in the minds of some traders. They've probably heard umpteen tales of people's life savings going up in smoke because they put it into options trading. Now, are those stories true? Sure, some of them are. Will investors continue to lose money this way? They certainly will, but only if they make preventable mistakes.

People who lose big money trading options are usually under informed about the unique strategies of this type of investment. They don't really know what they're doing, but they go ahead anyway.

Options pack some real power, and with that power comes risk. Think about this as a broad concept: a bicycle may eventually get you where you want to go, but a motorcycle, with all its horsepower and speed, will get you there far quicker. Now, which is the safer method? It's very simple: the one with much less power. But if you take all of the proper precautions in operating the motorcycle, the risk is diminished: You obey all traffic signals and rules. You wear a helmet. You might even complete a motorcycle-safety course. You've educated yourself as well as made a conscious decision to stay vigilant and aware. You're infinitely more likely to get to your destination unscathed than the guy in the other lane who's just hopped aboard a Harley for the first time because it looked like a blast.

This premise absolutely applies to options trading. At Uncle Bob's Money, we handle this powerful investment tool with the care it calls for, and within limits that keep risk well contained. That means sticking only to known income-generators with long-term success, and only trading them on the big indexes, such as the S&P 500.

The answer, then, is that options are only as risky as one allows them to be. Knowledge is not just power but protection as well. As long as you stay within your risk limitations and proceed under the guidance of someone trustworthy and experienced in this type of trading, you will be all right.

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