Are options “risky?”
Of course, like all products, options trading presents risks. But the actual range of risks is far broader than for virtually any other investment alternative. The perception of options as always high-risk, exotic, or mathematically incomprehensible, is based largely on the industry’s jargon and on some well-known but high-risk strategies like the ominous naked call. Like a bad dream, no one wants to be caught naked, right?
The solution is education. The amazing point about options is that the range of risk is so broad. Strategies can be suited to match any risk tolerance level and this is being realized more and more as mainstream stock investors discover more about options. The bottom line is that options can be used to manage portfolio risks, and not just as high-risk speculative plays.
Yes, options are “risky.” But when you compare a range of strategies to just taking long positions in stock, they reduce risk rather than increasing it. Ask anyone who was in the market in 2008.
About this week’s Heavy Hitter
Michael C. Thomsett is a widely published options author, with six options books in print, published by John Wiley & Sons, FT Press, Amacom Books, and Traders Library. He blogs at FT Press and his website is www.MichaelThomsett.com.