Options Myths Presented By:

Options Myths Options involve risks and are not suitable for all investors. Prior to buying or selling options, an investor must receive a copy of Characteristics and Risks of Standardized Options. Copies may be obtained by contacting your broker or The Options Industry Council at One North Wacker Drive, Chicago, IL 60606. In order to simplify the computations, commissions, fees, margin interest and taxes have not been included in the examples used in these materials. These costs will impact the outcome of all stock and options transactions and must be considered prior to entering into any transactions. Investors should consult their tax advisor about any potential tax consequences. Any strategies discussed, including examples using actual securities and price data, are strictly for illustrative and educational purposes only and are not to be construed as an endorsement, recommendation, or solicitation to buy or sell securities. Past performance is not a guarantee of future results. This presentation should not be construed as an endorsement or an indication by FIA or OIC of the value of any product or service described in this presentation.

Options Myths • Understand


• Risks • Education

is key – success comes from hard work

• Pricing • Position

management • Trading plans • You are not alone – OIC, brokerage firms, books • In this case help is only a phone call away (1-888-OPTIONS)

Educational Resources • The

Options Industry Council

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• Brokerage


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The Myths

Myth #1 Selling options is the best way to make money since 90% of options expire worthless. •

2005 statistics* show: -

35% expire worthless 17% are exercised 48% are closed prior to expiration

Knowing risks/rewards Understanding strategies and having trading objectives (realistic expectation) are of utmost importance

* Source: The Options Clearing Corporation

Myth #2 Being assigned is bad! • It

depends – What were your objectives?

Selling a stock at a higher strike price? - Buying the stock at a target price? -

Myth #3 Buy low-priced options because they’re cheaper. • “Low-priced”

options usually have greatest potential of expiring worthless

• Consider

the risk/reward of high leverage

• Consider

what needs to occur to profit from a leveraged (or out-of-the-money) position

• Your

forecast and timeframe are key drivers

Myth #4 Options are short-term; impossible to forecast for short-term! • LEAPS




- Long-term Equity Anticipation Securities cover 475+ stocks, ETFs and indexes

• Their

time until expiration goes out as far as 31 months

• Options

also available for 6-8 month periods

Myth #5 Options are for gamblers and high-risk takers. • There

are many options strategies for the conservative investor

• Some

options strategies are more conservative than only owning the stock by itself

• How

conservative was owning Enron without owning put options?

Myth #6 Options are too risky!

Options allow you to: Limit your risk to the amount of the premium invested • Hedge with little capital outlay compared to alternatives • Trade with lower capital outlay than stocks • Have choices by choosing your time period, strike prices, etc. • Trade in bullish, bearish and neutral market conditions •

Myth #7 I bought a put option to protect my stock and it expired worthless…I wasted money! • Was

the protective put cost worth the peace of mind?

• Do

you feel the same way when your house doesn’t burn down and you’ve purchased insurance?

• Ways

to offset hedging costs = “Collar”

Myth #8 Options are bad for the markets. • Professionals

making markets provide liquidity • Professionals provide bid-offers to “off-floor” investors • Options allow investors to enhance their stock portfolio: -

Increase income Reduce downside risk Reduce overall portfolio volatility

Myth #9 Sellers are smarter than buyers. • If

your forecast is wrong, being a seller may not help you

• In

a bullish market, buying calls may be very profitable

• In

a bearish market, buying puts may be very profitable

• Very

important to know forecasts and goals and match to appropriate options strategy

Myth #10 It’s better to buy calls than puts, since the market is more up than down over time. • Must

have a forecast for the underlying security and market

• Strategy • Can

must conform to that forecast

utilize puts or calls to set that strategy

Myth #11 Nobody exercises options before expiration. Early assignment risk is negligible. • Early

exercise can take place close to expiration (17%)

• Early -

exercise may occur due to:

Dividend considerations Time value “give-up” considerations In-the-money and near parity with time value gone

Myth #12 Options are a zero-sum game.

Market-makers and investors have: • Different


• Different


• Different

position management techniques and goals

• Different

ways to manage risk by hedging with stock, futures

Myth #13 The commissions and spreads on options are too excessive to make any profits. •

Choose strategies and targets that allow for profits

Shop around for commission rates

What are your needs?

Don’t overtrade – place a trade or implement a strategy that you believe has a high probability of success

Market competition has narrowed the “spread” on most options prices

The longer out you go, the wider the spread may become

Myth #14 Options are too expensive – the exchanges are charging too much! •

An exchange is a marketplace for buyers and sellers

Exchanges do not charge the customer for any trade

The marketplace is efficient – options pricing factors (volatility, time to expiration, underlying price, strike price interest rates) set the stage – at the end of the day however…

Supply and demand will exert its influence

If you think the options are “expensive” consider strategies that involve selling premium

Myth #15 Limit Orders are better than Market Orders. • You

may never get “filled”

• Your

stock may hit your forecast price and you weren’t in because you held out for a mere nickel or dime

Myth #16 If I buy an option and the stock doesn’t move, I lose all of my money. • Risk

is limited to premium paid

• Apply

good portfolio management methods

• Partial

premium might be recouped by closing position before expiration

• Consider

“roll-out” and buying more time if stock doesn’t move

• Have

a stop-loss both for price and time

• Opinion

vs. Money

Myth #17 Stock and index options are the same. • Equity

options are “American” style; can exercise at any time up until expiration

• Index

options settle in cash

• Most

index options are “European” style exercise; can’t exercise anytime before expiration

• Equity

options expire with the underlying security

Myth #18 Covered writing is good because most options expire worthless. There must be objective goals for covered writing • Outperform • Sell

in a sideways market

stock at a target price

• Limited

downside protection

Myth #19 Covered writing forces you to “sell your winners and keep your losers.” • Investing • Stocks

requires active management

no longer fitting your objectives should

be sold • If

an assignment occurs, you can repurchase the stock if you are still bullish or view the stock as “positive”

Myth #20 I’m doing a covered write – the larger the premium, the better! • The

markets are “efficient” so that high premium may point to higher risk and volatility

Myth #21 Covered writing underperforms. • Does

covered writing outperform in “sideways” markets?

• Know • Are -

your objectives

you looking for:

Downside protection? A target price? Income?

• Use

the strategy that fits your goals and forecasts

Myth #22 I sold a covered call and since then the stock is up…I’m losing money on the call. • Understand

the strategy – realistic expectations

• Remember

why you sold the call and what were your objectives

• The

call will increase in value as the underlying increases

Myth #23 I sold a call against a stock I own and the stock went down and I lost money…these options don’t work! • Understand • Why -

the strategy

did you sell the call?

Income? Reduce downside risk?

• Risk

is the stock in covered calls – options actually helped

• Stock

going down – time to perhaps lose the stock

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