The “options” market is more speculative in nature than normal stocks and bonds. Whereas with stocks and bonds you are able to tie current values into business data, with options you have to make projections (which often are no better than wild guesses) about where the business data will lead in coming months or years.
Options fall into two categories: Calls contracts which give you the right to buy a security at a specific price, and Puts contracts which give you the right to sell a security at a specific price. Investors and traders may sub-classify their options in other ways, however.
Research shows that advanced investor/traders work with both normal securities and options. In fact, some people argue that options may be the safer trade when you have enough information to work with because the prices on stocks, bonds, and commodities can fluctuate in response to irrelevant news (such as when one country invades another).
Although most securities prices recover from “news shock” that may take time and you may have to buy or sell at the worst possible time; hence, having invested in options may give you a way to keep your trading “smooth” and relatively shock-free.
But just because options trading may pay off for you over time, that doesn’t necessarily mean that the options markets are safe places to play. Other research suggests that options trading may cause greater spreads in price fluctuations in otherwise narrow trading windows. This means that securities prices may fluctuate higher or lower because of options than if the options were not available.
Whether you are just learning the basics of options trading or have been investing in options for several years, it’s important to be aware of government advisories about fraud in options trading because you want to manage your risks responsibly.
Trading in options is no simple game. In fact, research shows that predicting market changes is hard even for very experienced economic prognosticators. That level of uncertainty should help you maintain a healthy respect for the risks that trading in future prices entails.
There is no 100% sure guaranteed way to make money in securities trading, no matter how well the other guy may seem to be doing. So, is trading in options a good investment strategy? Do your homework, set boundaries, and keep a solid financial reserve and you may just find it’s an excellent investment strategy. Just don’t expect to get rich over night.