Money Matters: Option trading: Learn it before you try it

Investors, especially young ones, always ask me about stock options. In my years of trading, actually decades, I have seen one-day losses that would make your hair curl, and one-day gains that would buy a new car. My worst day was the 1987 one-day crash that wiped me clean of $180,000, almost half of what I had accumulated as a young trader. Over the decades, using what took me years to learn (and after many painful and costly lessons), option trading has become something I do daily. On some days, I make as many as 20 to 30 trades a day. But that one day in October 1987, known as Black Monday, was obviously not a good day, nor were the weeks that followed. I was severely depressed for months. The sting of that day has long since disappeared, as my trading strategies and knowledge about how to trade options increased and I matured into a seasoned professional trader. The lesson I learned from that day, however, was to always use one strategy what most if not all professional traders use: "Let your gains run and cut your losses." I practice that religiously in my trading, and in all portfolios and retirement accounts. An interesting side note is I know few, if any, professional advisors who do this in their clients' accounts. They may be out there, but I don't run into them. Why, I have not a clue, but you'll likely never find a professional trader using their own money or large hedge funds that manage billions that don't cut some, if not all, of their losses at some point, especially the option traders. Options are highly leverage bets which can move so fast it can make your head spin. They are definitely not for the young, inexperienced traders who don't fully understand how they work, and investors who have no idea what a stop-loss strategy is. There are hundreds of ways to trade options, many with funny names and complex strategies which entail multiple positions and some with very complex math requirements needed in order to access risk and reward. Frankly, there are so many, I don't know all of them and am still learning after decades of trading. I see a fair number of investors who are semi-beginners that dabble in options. Most don't understand much of what options really do, how they work and what the real risks are. As a result, I do hear stories of how some beginners make money, sometimes a lot of money, but the majority of novice options traders I run across who dabble in this very volatile market lose. And some lose big time. It's impossible to describe all the ways one can trade options, as there are so many variations and strategies. Just know they are essentially leveraged bets, where an investor puts up some money and begins the thrill ride options provide. Whereas owning a share of stock may yield gains (or losses) of a dollar for each dollar of stock price movement, options can multiply those gains or losses many times over, and it can happen within hours, minutes or even seconds. A hard fast rule is DON'T TRADE OPTIONS unless you know what you're doing. And knowing what you're doing may take hours, days or even years of study. A beginning investor enticed by the possibility of the hyper-accelerated movement of balances options may provide should start by a hard study of what options are, the difference between what kind of options are out there, then set up a bogus option account where no actual money is deposited. In other words, you use what I call ghost trading, more commonly known as paper trading, where you don't actually trade but just track how you would have done had you used real money. There are many platforms you can use that are available for paper trading on the web and as much educational material one would want. In conclusion, I would avoid buying a service that recommends actual option trades until you understand how options work and the risks they entail. This article expresses the opinion of Marc Cuniberti and is not meant as investment advice, or a recommendation to buy or sell any securities, nor represents the opinion of any bank, investment firm or RIA, nor this media outlet, its staff, members or underwriters. Mr. Cuniberti holds a BA in Economics with honors, 1979, and California Insurance License #0L34249. His insurance agency is BAP INC. insurance services. Email: news@moneymanagementradio.com