Seven Common Sense Observations on Option Trading

Focus: OPTIONS

Gary Delany Image Gary Delany Director of European Marketing and Education, Options Industry Council

Advertorial- Although trading options may seem complicated to many investors and traders; Gary Delany, Director of European Marketing and Education at The Options Industry Council, discusses seven observations that he has made while trading options.

There is a lot of information available on using options as a hedging or investing tool, but sometimes it’s hard to see the wood for the trees. Here are seven common sense observations on options trading to keep you focused.

  1. Options are not magic

There is a tendency among some investors to see options as a mystical tool. They are not. In just the same way as you would do your research if you were investing in the underlying security, you need to do it for an option trade. Is the security trading in a tight range? Is it about to spike, up or down? Are you concerned about the impact of a sharp down move on your portfolio?

  1. How much do I know about options?

Of course the answer is ‘never enough,’ but there are some core themes that you need to understand. Here’s a few of them:

Basic Mechanics
Do I understand the contract terms for an option trade – call, put, exercise (strike) price, premium, expiration etc.?

What is the right or obligation of the option buyer and the option seller?

What does at-, in-, or out-of-the-money mean?

Choosing a Strategy
What are some of the typical strategies that market users are employing for hedging or investment?

Do I know how to work out the profit and loss of my position for various price outcomes?

What’s my upside, and my downside?

What is my personal risk profile like?