Novice Traders' Notebook  |  AUG 1998

Basic Options Techniques by Mark Vakkur, M.D.

Many stock traders and investors avoid options because they seem too complex or risky. Although it is very easy to lose large amounts of money in a very short time misusing options, investors and traders of all kinds should at least consider them as one of many tools to exploit market opportunities. Here's a primer on using options, with common terms and applications of options strategies. Although a thorough discussion of options is impossible in the space of a single article, it is important to introduce a few basics. There are, if nothing else, two outstanding but little-used options strategies for the markets that should be discussed — buying deep-in-the-money call options as a proxy for purchasing the stock and selling options against that position to create a high-probability, high-return alternative to conventional covered-callƯ writ-ing. The paradox of these strategies is that despite their reputation as being risky, they can be less risky than buying the underlying while offering all, if not more, of the potential return.

by Mark Vakkur, M.D.