Ask Stacy: Should I Invest in Stock Options?

Hang around enough investing websites or watch enough investment shows, and sooner or later you'll hear about stock options. Are they a good way to play the stock market, or a sucker bet?

If you don’t believe this, conduct this test: Call any accountant who does personal income taxes for a living. Ask them how many clients they’ve had over the years who consistently made money speculating on stock options. Let me know what they tell you.

Options as a hedge

Options do have legitimate uses. For example, they can help hedge a portfolio. If you own Apple and think it’s going lower between now and next month, you could sell a call option and earn extra income. This is called covered call writing. Or you can buy a put option that increases in value if Apple goes down, thus purchasing a kind of insurance policy against a price decline.

But these strategies are ways to gain extra income or protect the value of stocks you already own. If you’re using options to speculate on stocks you don’t own, you’re cruising for a bruising.

The bottom line

There’s a lot of interest in options these days, such as shows on CNBC and heavily advertised websites and trading platforms that can’t wait to transform you into an active, commission-paying trader of everything from options to foreign exchange and commodity contracts.

But while these companies attempt to paint a glamorous picture of what derivatives can do for you, consider this: I lost more money learning about options the hard way than I paid for college. Seriously.

Of course, you could be smarter than me. I couldn’t make a living playing poker, and there are people who do. But even if you fancy yourself one of those people, there’s no reason to pay $80 to people like Kiyosaki for a course. There’s an infinite amount of free information online and at the library about stocks, options and every other type of investment.

If you do decide to go forward, I’d also urge you to play this game on paper for a long time before risking any of your hard-earned cash.

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About me

I founded Money Talks News in 1991. I’ve earned a CPA (currently inactive), and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate. Got some time to kill? You can learn more about me here.

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