Stan Freifeld

Options Fact or Fiction

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8) You're better off only buying low-priced options to limit your risk.

Fiction: Low priced out of the money options are the options traders' equivalent of lottery tickets. They have high potential returns but a low probability of success. Serious traders don't consider that a business.

9) You should only buy call options when you predict a stock is going up and only buy put options when you predict the stock is going down.

Fiction: That's certainly how a stock trader would think, but not necessarily an options trader. Options traders think more in terms of spreads. So, I wouldn't mind buying a call option on a stock that I think will go down, as long as I sell another call that I think will go down a greater amount.

10) When you buy an option, even if the stock makes a big move in the "right" direction, there's no risk that the seller won't have enough money to pay you.

Fact: That's what exchanges are all about. The Options Clearing Corporation is considered to be the contra side of every trade and insures that every trade obligation will be met. Is it possible that something horrific could happen and the OCC couldn't meet its obligations? Highly unlikely, due to margin requirements and other safeguards, but theoretically possible. However, if that were the case, the financial state of the economy would be in such upheaval, that we would all have a lot more to worry about than our options trades.

11) Trading options is great, since you can put on a spread position and then go on vacation and not think about the position until you get back.

Fiction: Despite what you might see on the late night cable channels, all positions must be monitored to some degree. The unexpected happens a lot more commonly than anticipated, and by keeping an eye on your positions, you'll be able to take defensive actions and minimize losses in those cases.

The Results

Okay, we're done. So how did you do? Here's my totally unscientific analysis of your results, based on the number of questions that you answered correctly:

* 11: A perfect score: I'm impressed! You should be writing the articles!

* 9-10: You're probably making money with your options trading

* 6-8: You're getting there! Continue to read my articles.

* 3-5: Continue to read my articles, and this website, and the archives, and some options books while you're at it.

* 0-2: Did you know that the Brooklyn Bridge is for sale?

Stan Freifeld is an instructor with the Online Trading Academy. To learn more about him, read his bio here

This article originally appeared on The Options Insider Web site.