If you feel like Alice in Wonderland when you start to look into options trading strategies, you're not alone.
Even so-called "experts" struggle with options. It gets even uglier when they attempt to bring it down to earth for their readers.
Yet, if anyone can do it, I can.
I've written six books about options, and have been trading options myself for more than 35 years.
It means that I have already made every mistake in the book so you don't have to.
So why should you learn about and invest in options?
Done right, you can use options to create a virtual cash cow – often quickly, and often with very little risk.
Options Trading in Action
Say you felt pretty confident GLD was going to go up in the next 12 months. You could have gone "long" GLD by buying 100 shares.
Of course, you'd have to be ready to plunk down about $13,000 for them. But if you had that kind of cash you would have done pretty well.
A year later, GLD was trading at $160, and your 100 GLD shares were worth $16,000. That's a nice 23.7% gain.
But you would have done even better if you had used options.
Let's say, instead, you bought one $135 call. (A "call" is just a bet on the price of GLD going up from $130; the same thing you're betting on when you buy the stock.)
A year ago, GLD calls were trading at $9.00. So you would have spent about $900 to initiate the trade. Yet by the expiration month, the price of the calls had risen to $28.00.
That means the price of the option "contract" you bought was now worth $2,800-giving you a 300% gain on the very same price move in GLD.
Now where I come from, 300% is much better that 23.7%. That's the power of options.
And there's more...
The Power of Options... to Manage Your Portfolio
Simply put, options are amazing and versatile tools. They can be very speculative and high-risk, giving you spectacular returns. Or they can be more conservative, giving you consistent double-digit returns while also serving as a tool for portfolio management.
Here's what I mean by "portfolio management."
You can apply option trading strategies to a traditional portfolio of "long" stock positions to manage, reduce, and even eliminate risks.
For example, you can buy puts to play a bear market.
This means you can avoid the high risks of shorting a stock (because you are "long" the puts), yet still profit from a falling market (even while everyone else sings the blues).
There is just no other way to do this so safely.
It's why risk management is one of the most exciting uses of options, as well as the focus of much of the big increase in options trading in recent years.
Because truly, using options to protect your portfolio is a huge trend.