Benefit of playing options

I assume you would agree with me that most people have no idea about stock options, especially how to safely play with it. Generally, people will turn off whenever option is heard. “It is too risky”. This is likely the general reaction about playing options. Indeed, options can be very risky as it can easily go down to zero if the trend and timing are not right. But as a matter of fact, option is designed to reduce risks, not increase them, believe or not!   If you play with it appropriately, it is a great and very safe tool to substantially reduce your trading risk while giving a good leverage power. Here is the real life example I just got.

Over half a year ago, through my connection I got a hint based on their analysis that a small biotech Audentes Therapeutics (BOLD) could fly soon. It is a small gene therapy company that may attract big boys to buy it. From its TA, it seemed ready to break out. So I decided to give it a try. Well, again, timing-wise I was quite early as the stock went sideways for a while and then declined a lot, over 25% at one point. If I had played with the stock itself, I would have been stopped out. Fortunately I didn’t. Rather I played with its calls. The beauty of options is that you can pre-determine the max loss you may incur for a trade and as long as you play within your comfortable zone of the position size, you don’t need to worry too much about stop loss as the cost is usually a fraction of the stock price. In other words, even if I lose 100%, I may still lose much less than the 25% of the stock value if I use a 25% stop loss for protection. Glad I stayed on with it. As you may know, BOLD indeed got bought out by Astellas for a 110% premium. My call options got a moonshot with a 3 times gain as the result. Sure it is a pure luck to hit a MA deal as no one can really predict this kind of outliers but it does help to verify the safety of playing options for risky trades. The key is how to play it appropriately! The problem for most people is that they use option as a leverage tool to bet excessively on something but most of the time buying options (calls or puts) will lose money (purely based on the statistical probability as options are wasting assets) and with that they can easily be killed financially. Don’t be one of them!!