Skinned knees can motivate you to learn.
Show of hands here: how many of us traded equities in the go-go 1990s with a single strategy: buy low, sell high, repeat? And how many people do you know who got burnt when the bubble burst and that strategy lost its momentum?
Don't feel badly, it was a very common occurrence. I call this the "empty toolbox" syndrome: as long as everything's working in the marketplace, traders made money, but as soon as circumstances changed, investors reached into their strategy toolboxes and came up empty. This was all they'd learned to do.
If you're reading this, though, chances are you're one of the toughest, savviest investors who picked themselves up after the fall and asked: how can I arm myself with ways to make money in all kinds of markets? Driven by pain -- and pain is unfortunately a great teacher -- these investors sought education on new strategies, so they wouldn't be caught empty-handed again. And lots of these savvy investors have noticed what the "big boys" - institutional investors and hedge fund managers - have known for a long time: it's by judiciously mixing derivatives like options into your trading strategy that one helps a portfolio consistently perform through up, down and sideways markets.
Another show of hands: are you holding any stocks that took a walloping, but you still believe they'll come back someday? That's you, me, most of us, probably. Arguably, every one of us should've considered selling out-of-the-money covered calls on that stock and earning some income as we wait for the big turnaround. (I'd point you to the OIC's online seminar for more info on covered-call writing. We also offer a Flash tutorial from our Learning Center; just click on "Complete OIC Education" under "Market Education".)
I should mention in passing that, in my hypothetical example, selling OOTM covered calls would've had its risks, too: if your long stock did make a sudden positive move, you'd have run the risk of assignment, in which you'd have to deliver your long stock to the buyer of your covered call. In other words, you'd stop being a long stock holder participating in the long-term upside of that position.
Options trading can fill out your toolbox of strategies so you have something to reach for in up, down and sideways markets -- but bear in mind that each of those strategies has risks. Market conditions can and do change suddenly, so what's an appropriate strategy today can suddenly reverse on you. Know your strategy, but also know your risks in advance -- and how to exit if your position doesn't seem to be working out.
Options traders realize a painful fact: we can't eliminate risk without also eliminating reward, so better to know the risk that you're dealing with. Options trading strategies run from income-producing, lower-risk strategies like covered call writing to highly speculative strategies where the risk is unlimited. But there are many strategies along that risk continuum where you can quantify and isolate your risk, so you can make more informed decisions about how much profit you'll chase versus how much risk you'll take on to do so.
