Options  |  MAY 2008

Options: The Missing Link by Martha Stokes, CMT

Options: The Missing Link by Martha Stokes, CMT What’s the link between an option and a stock? growing numbers year after year. The Options Industry Council offers excellent free education on options, and there are good option courses out there. The lure of options is undeniable. Every year, thousands of traders attend seminars and buy books on options in their pursuit of profit. The desire to leverage a small amount of capital to make huge gains in the market draws people to options in ever-growing numbers year after year. The Options Industry Council offers excellent free education on options, and there are good option courses out there. However, most option players spend more money studying strategies at option seminars than they ever make back in profits from trading options. Option players generally do far worse on their return on investment than investors who simply buy & hold stocks long term. Why do option players, with the power of leverage behind them, do so poorly compared to their buy & hold counterparts? The answer is more basic than you might think. THE MISSING LINK There must be a connection or link between the underlying stock price action and the selected option strategy. Without this crucial link, option players struggle with mediocre results. To explain this, it is important to take a brief history lesson. Candlestick charting, which is frequently taught alongside option strategies, was first developed in Japan in the 1700s, used in the rice exchange that was set up in the late 1600s (the world’s first, according to Steve Nison). So futures markets have been around for a long time as well as stock markets. The differences between futures markets and stock markets, however, are numerous.

by Martha Stokes, CMT