To understand why investors should consider using options trading to enhance an investment portfolio, we need to first understand the core psychological obstacles we face as investors.
It is human nature for investors to be overconfident in their predictions about the market.
This is natural because the more research that one puts into their investment opinion, the more the investor sells himself on that opinion.
In most cases this leads to many investors overestimating their probabilities of being right.
When that investor overestimates the probability of being right, they likewise equally underestimate the risk that they expose themselves to when investing.
This imbalance is the greatest risk as the emotion of pride of opinion becomes the investor's worst enemy.
Finally, the average investor is under the illusion of being in control.
Inevitably when presented with an ambiguous situation with the investments, regret and fear tends to leave the investor acting like a deer in headlights who is not able to make a decision.
Knowing that investors have many obstacles, it is important to know when it is prudent to take the time to educate yourself on options trading, which I commend you for doing: Here you will learn to protect your investments.
You will learn how to generate consistent cash flow from your investments.
And you will learn to leverage your investment beliefs while being able to quantify the risk that you are exposed to.
Now let us take the opportunity to review the myths of options trading.
Myth #1 - Options are hard to learn.
The reality is that pro traders can use options for complex combinations.
These are spreads with very specifically defined target outcomes.
For a beginning investor, having someone explain these strategies is overwhelming.
But realistically, the core uses of options can and are relatively simple.
With just a little bit of time and effort and experience, like anything one can grasp the foundational principles to be able to participate without many complexities.
Myth #2- Options Trading is risky.
The reality is that when used haphazardly, an investor can over leverage themselves on an investment that is confined by time.
But at the same time, when used prudently options can reduce the volatility of an investment.
It can quantify the risk that an investor exposes themselves too, and it can be used as a conservative method of generating cash flow in a portfolio.
Myth #3 - Investors always lose money to the pros when options trading.
The reality is that an investor has the ability to take either the sell side or the buy side of an options trade.
The option itself is priced based on the volatility risk of the underlying stock.
So as long as you, as an investor, know what you want, you can use options to optimize your expected outcome.
Myth #4 - Options are a great way to get rich fast.
The reality is that options are tools for the investor.
This does not guarantee anything.
But when options are used correctly, they can give you many alternative strategies to attaining your investment results.
Myth #5 - Trading stocks is safer then trading options.
There is no denying that there are more variables to learn with options trading, but that doesn't particularly mean that there is more risk.
When looking at an individual stock, it has an unquantifiable risk.
With pure stock ownership, the only accepted method to reduce that risk is through diversification.
Alternatively, when options are used correctly, they can quantify and help to manage risk, even in concentrated stock positions.
To summarize, if you take the time to learn options trading strategies.
You will have increased flexibility to manage a portfolio.
You will be able to define your worst case scenario going into a position.
You will be able to generate consistent income on your investments.
And you will have many alternative strategies beyond the traditional buy and hold.
It is human nature for investors to be overconfident in their predictions about the market.
This is natural because the more research that one puts into their investment opinion, the more the investor sells himself on that opinion.
In most cases this leads to many investors overestimating their probabilities of being right.
When that investor overestimates the probability of being right, they likewise equally underestimate the risk that they expose themselves to when investing.
This imbalance is the greatest risk as the emotion of pride of opinion becomes the investor's worst enemy.
Finally, the average investor is under the illusion of being in control.
Inevitably when presented with an ambiguous situation with the investments, regret and fear tends to leave the investor acting like a deer in headlights who is not able to make a decision.
Knowing that investors have many obstacles, it is important to know when it is prudent to take the time to educate yourself on options trading, which I commend you for doing: Here you will learn to protect your investments.
You will learn how to generate consistent cash flow from your investments.
And you will learn to leverage your investment beliefs while being able to quantify the risk that you are exposed to.
Now let us take the opportunity to review the myths of options trading.
Myth #1 - Options are hard to learn.
The reality is that pro traders can use options for complex combinations.
These are spreads with very specifically defined target outcomes.
For a beginning investor, having someone explain these strategies is overwhelming.
But realistically, the core uses of options can and are relatively simple.
With just a little bit of time and effort and experience, like anything one can grasp the foundational principles to be able to participate without many complexities.
Myth #2- Options Trading is risky.
The reality is that when used haphazardly, an investor can over leverage themselves on an investment that is confined by time.
But at the same time, when used prudently options can reduce the volatility of an investment.
It can quantify the risk that an investor exposes themselves too, and it can be used as a conservative method of generating cash flow in a portfolio.
Myth #3 - Investors always lose money to the pros when options trading.
The reality is that an investor has the ability to take either the sell side or the buy side of an options trade.
The option itself is priced based on the volatility risk of the underlying stock.
So as long as you, as an investor, know what you want, you can use options to optimize your expected outcome.
Myth #4 - Options are a great way to get rich fast.
The reality is that options are tools for the investor.
This does not guarantee anything.
But when options are used correctly, they can give you many alternative strategies to attaining your investment results.
Myth #5 - Trading stocks is safer then trading options.
There is no denying that there are more variables to learn with options trading, but that doesn't particularly mean that there is more risk.
When looking at an individual stock, it has an unquantifiable risk.
With pure stock ownership, the only accepted method to reduce that risk is through diversification.
Alternatively, when options are used correctly, they can quantify and help to manage risk, even in concentrated stock positions.
To summarize, if you take the time to learn options trading strategies.
You will have increased flexibility to manage a portfolio.
You will be able to define your worst case scenario going into a position.
You will be able to generate consistent income on your investments.
And you will have many alternative strategies beyond the traditional buy and hold.
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