When posting portfolio updates, the questions that I receive the most pertain to the use of stock options. Therefore, I have decided to devote an entire section of this website/blog to stock options.
Please note, I am not a professional options trader. I learned about using options by doing, not by reading a book or taking a class. In fact, I have never taken a class on options nor have I read any book about stock options. What I learned and what I do, I have learned by my own experimentation and by engaging in conversation and sharing ideas with other investors who also use options. Therefore, what I’ve done and what I describe in my options posts may not be the best or optimal use of options, but it has worked well for me.
Options can be used in many ways and for many purposes. Some of the uses of options can be very risky and dangerous if not used prudently. Every investor (and trader) should weigh the risks and rewards of any options trade to determine if they want to engage in that trade. Particularly in some cases, options can be used as a vehicle to employ leverage on one’s portfolio. Leverage cuts both ways and special consideration should be taken whether it is prudent to use any leverage at all. I personally employed options too aggressively in 2015 and 2016 and suffered massive losses as a result; I was lucky that my entire portfolio and more than 20 years of effort to accumulate assets were not completely wiped out. Fortunately, I eventually recovered and now I pay close attention to risk management and leverage limits. Ironically the loss that could have been devasting turned out to be an invaluable experience that has made me a better investor.
There are professionals who trade stock options for a living. Many such traders look at charts, trends, support levels, moving day averages, trading volumes, and a variety of other indicators to inform their trading decisions. I think it’s safe to assume that the majority of such options traders don’t have a thorough understanding of the stocks that underlie the options that they are trading. In fact, I would guess that in some cases these traders don’t know much about the actual fundamentals and financial metrics of the companies on which they trade options. In contrast, I have found that starting with a solid understanding of the business and financials of the companies is the foundation that informs what I will do with options. For me, everything else is secondary. Furthermore, I believe that my comprehensive understanding of companies/stocks gives me a distinct and powerful advantage that increases my chance for successful options trades.
Within the posts of this section of the blog, I will not be covering or explaining the basics of options. Therefore, some prior knowledge of the kinds of options available, the mechanics of how they are bought and sold, and the basic concepts and vocabulary behind stock options will be essential to grasp the essence of my posts. If you have not learned these basics prior to reading my posts, then you will likely not find my posts very useful.
The opinions, thoughts, analyses, stock selections, portfolio allocations, and other content is freely shared by GauchoRico. This information should not be taken as recommendations or advice. GauchoRico does not make recommendations and does not offer financial advice. Each person/investor is responsible for making and owning their own decisions, financial and otherwise.