Do I Need Options?

Do I need Options? That's the question, a personal question. No, I am not talking about whether we need options in our day-to-day decision making or in life! I am referring to the magical world of Options Trading.

Why I call it magical? Well, it's because it's one of the few investment tool (that I know of) that can actually make money whether the underlying asset prices go up, go down or even sideways! Sounds great isn't it? Looks simple but indeed the tricky part is one must be able to first make the right prediction on which direction to go for. If the prediction is right, one could gain handsome gain or even a windfall. Here's another interesting part...if the prediction is wrong, you could lose everything (your option investment value) or simply cut losses to avoid losing it all.

Options trading is essentially an investment tool that allows an investor the option to exercise his or her rights to buy or sell an underlying asset at a specific price on or before a specific date. Key to remember is it's an option, not an obligation. There are 2 types of option, being the Call and Put Option. In simple terms, Call option gives the right to buy whereas Put Option gives the right to sell. Option also comes with an expiry date. Upon expiry, the option is simply worthless!

Why use options? First of all, option is much less expensive compared to owning a share. The price is often a fraction of the underlying share price but the potential gain can be huge! Well, options can serve two purposes, i.e, hedging or speculation. Based on the above scenario, an investor speculates on the movement on an underlying stock. If his prediction is right, he exercises his option to make a profit. If his prediction is wrong, he simply do nothing (and ultimately loses the contract value) or cut losses by selling his option. By the way, it's possible that an investor can make 1000% of return in a matter of one day or days if he or she times it to perfection! However, bear in mind timing is more of an art then science!

On the other hand, an investor can use options to hedge against his direct investment in an underlying stock. The idea is to hedge against his stock exposure, i.e, he gets one right and the other one wrong, hence, he doesn't lose completely in the event the underlying stock price go the wrong way. In theory, a person just can't "lose"!

Well, sounds exciting! So, why won't everyone just go for this and makes lots of money? The truth is, this is a highly complex tool and very risky too. An option investor needs to closely monitor the market condition, possesses lots of technical know-how and keeps it tight to the discipline. Else, anyone's investment can just be wiped off overnight!

My conclusion is that options can be a powerful tool to creating riches but is not meant for everyone! A person needs to possess the right skills and experience, appetite, attitude and sound money management. It's certainly not as easy as what some of the experts have quoted!

As for me, I don't mind adding another valuable jigsaw into my investment life but is a huge deterrent to me at the moment due to fact that the timezone of the world's largest option trading market (the US!) is a real disadvantage to me. Why? It's simply because i value sleep more than making money at the expense of health! It's just my choice of life.