The Options Insider - Your Inside Source for Options Information

Where's the Pony?

Where’s the Pony?

Time to expiration, price of the underlying, implied volatility, historical volatility, puts, calls, delta, gamma, theta, vega, in the money, at the money, out of the money, intrinsic value, extrinsic value, higher commissions, egregious bid ask spreads, no options traded on a stock with a beautiful technical set up, multiple potential beasts and physiologies, LEAPS; why would one even bother with options?  If I retain a shred of rationality, an open question to be sure, there must be some reason to complicate my life with these additional variables.

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Ronald Reagan was fond of making a point with the story of the 8 year old boy who while visiting his grandfather’s farm fell into a pile of horse manure.  When his father found him a short while later, the boy was smiling ear-to-ear and happily shoveling away the muck.  When asked why, the son replied: “With this much poop, there must be a pony in here somewhere.”  Option trading is gaining popularity because the pony hidden beneath the pile of muck is (drum roll please): risk control.

Traders new to options often incorrectly focus on the ability to leverage positions, but in his classic summarization of this approach Jared Woodard opines:

But leverage, as anyone who’s followed the fate of the investment banks knows, is just a means for magnifying outcomes.  A leveraged risk-taker will experience more glorious wins and more disastrous losses, like a deranged person who shouts both poetry and obscenities (instead of whispering them quietly to himself, like the rest of us).

There are other logical and valid reasons for using options as one’s investment vehicle of choice to be sure, but the singular advantage of options is risk control.