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Stock Options: Five Pitfalls

Posted July 17, 2008

“Many people feel that options are too risky or confusing. To a brand new investor, that may seem to be the case. But, with the right kind of preparation and skill, option investing is just as easy as anything. You just need to be aware of some pitfalls that many investors fall victim to.” — Jim Nelson

by Jim Nelson

Baltimore – (TFN):  One of the best ways to make money in the stock market is to not buy stocks at all. But instead, buy a stock’s derivative — or option. This way, you can actually control more shares of stock than you would normally be able to afford with limited downside, and virtually unlimited upside.

Many savvy investors do this all the time, instead of wasting time on regular shares of companies that, at best, will only produce a tenth of what the company’s options will potentially bring investors. We’re talking about upwards of triple-digit gains when regular shares only bring in single-digit ones.

Unfortunately, many people feel that option trading is too risky or confusing. To a brand new investor, that may seem to be the case. But, with the right kind of preparation and skill, option trading is just as easy as anything. You just need to be aware of some pitfalls that many investors fall victim to.

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Here are the top five pitfalls you need to avoid to be successful with stock options:

Pitfall #5: Leverage

The basic concept of options investing is the ability to control more shares of a company for less money. For instance, say you wanted to buy 100 shares of Company X at $10 per share. You could either buy the shares outright and spend $1,000 or buy one call option and spend $100. That would give you the option to buy 100 shares of the company at $10 per share anytime before the date the call option expires. This is called the power of leverage. Read on to learn four more pitfalls.

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Posted by TFN-Investment Strategies · Filed Under Investment Strategies 

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