E TRADE Financial Corporation (ETFC), TD Ameritrade Holding Corp. (AMTD), Charles Schwab Corp (SCHW): Why So Many Investors Lose With Options

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But high-risk strategies aren’t the only way to use options. Often, you can use options to reduce the risk in your portfolio or to take on risks that you’re already comfortable with. For instance, if you want to hold on to a stock you own until it reaches a certain price but then plan to sell it, then writing a covered call allows you to receive a premium that you wouldn’t get from simply setting a limit sell order. Similarly, if you know you want to buy a stock if it drops to a certain price, then writing put options can similarly pay you a premium and result in your getting that stock at the price you choose — again, a better result than simply setting a lowball limit buy order.

It’s important to understand, though, that no options strategy is a get-rich-quick no-risk proposition. Even with writing puts and calls, the risk is that you commit yourself to buy or sell shares at a certain price. For instance, if you write a put and the stock falls even further than you’d expected, then you’re giving up the chance of potentially buying those shares even more cheaply. Similarly, with covered calls, the premium you receive compensates you for the fact that you’re giving up any potential profit above the exercise price of the option.

Should you use options?
In the end, options are another investing tool that can be useful to control risk in some situations. Plenty of investors have become wealthy without ever touching the options market, while others get a lot of value from the sophisticated strategies that options can offer. The key, though, is that if you decide to use options, be sure you know what you’re doing and understand the pitfalls that can result from common mistakes. Otherwise, you’ll find yourself in a high-stakes poker game where the odds are decidedly against you.

Many investors use options to generate income, but if that’s what you’re looking for, you might prefer simply buying stocks that pay healthy amounts of income to shareholders.

Tune in every Monday and Wednesday for Dan’s columns on retirement, investing, and personal finance. You can follow him on Twitter @DanCaplinger.

The article Why So Many Investors Lose With Options originally appeared on Fool.com.

Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends TD AMERITRADE.

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