Stan Freifeld

Options Fact or Fiction

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I've been around the options markets for a long time. At least 15 years as a professional and several more as a public trader before that. Despite all of that experience, I am still constantly amazed by some of the "facts" I hear about options.

These "facts" are often told to me as if they were written in stone. When I try to probe a little deeper to find the source of these "facts," I usually get some nebulous answer like "I know it's true, but I don't where I heard it."

Well, today I'm going to clear up some of these issues. To make this more fun, I'll present it as a fact-or -fiction test. For each of the 11 statements listed below, choose either fact or fiction. (To protect your monitor, make sure to print this out before doing any circling.)

1) Fact or Fiction: Options are too speculative for the general public to trade and make money.

2) Fact or Fiction: Seventy-five to 80% of options traders lose money.

3) Fact or Fiction: Since 90% of options expire worthless, the best way to make money trading options is to do what the smart money (market makers) do, sell options.

4) Fact or Fiction: Options trading is a zero-sum game, when one options trader makes money, another has to lose money.

This article originally appeared on The Options Insider Web site.

5) Fact or Fiction: Being assigned on your short options position is bad.

6) Fact or Fiction: Claims of having an outrageously high (90%-95%) win rate can possibly be true.

7) Fact or Fiction: If a stock is very volatile, then you should buy options since you can make money if the stock goes up or down.

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

9) Fact or Fiction: 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.

10) Fact or Fiction: 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.

11) Fact or Fiction: 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.

Pencils down -- let's see how you did …