by Christopher Smith, BBA, JD
Stock options are a highly effective wealth creation and preservation tools, used by large institutional investors and high net worth individuals who have achieved options mastery to enhance and protect their investment portfolios. These wealth creation tools have traditionally been unavailable to the retail public because of high cost structures, limited brokerage support, and a general perception that these instruments carry extreme risk.

In actuality, stock options are ideally suited for limiting risk. They are also very effective for enhancing portfolio returns. This combination of risk reduction and wealth enhancement are precisely why savvy investors have been quietly trading them while the rest of the public has been left to struggle with meager stock market returns and suffer the devastation of market declines.

Stock options are now traded on multiple exchanges with the NASDAQ, one of the world’s largest exchanges, announcing that they will also trade options on their platform. This has resulted in a highly efficient marketplace. There are also a growing number of options savvy brokerages that offer highly competitive commission schedules, which has forced the “big boys” to respond by lowering their rates and improving their support for retail options trading.

The only real barrier that now stands between you and these powerful wealth creation tools is a solid stock options education. The market has responded with an increasing number of stock option educators eager to help you learn option trading principles. However, options are a relatively complex subject and many “big name” educators avoid tackling the complexities of options for fear of losing their audience or simply because they do not fully understand the subject themselves.

The failure to fully grasp the subject typically means that the novice trader does not learn what they need to understand to become profitable. Surprisingly, some of the most expensive educational offerings prepare their students for failure in this very fashion.

Stock options are “derivative” securities, which means the value of an option is derived from factors other than the option itself. The relationship of these factors has been explained through a mathematical formula, commonly referred to as the “Black-Scholes Model.” That formula is the foundation upon which we can begin to build an understanding of how options work.

A sold stock option education must start by addressing the Black-Scholes pricing model, so that you understand what factors may effect option prices and how they interact with each other. Obviously, the option pricing model is an advanced subject and many educators do not cover this material in detail or, if they do, they save this material for advanced seminars. Failing to develop an understanding of option pricing theory results in a knowledge gap and leaves their students in a vulnerable position should they attempt to trade the markets without first learning how their positions will react to market changes.

The goal of any option education program should be to achieve options mastery. To do so, the stock option course must explore the option pricing model and provide a detailed explanation of each input to the model. By doing so, you will understand how stock prices effect option values, how market volatility can cause your position to rise or fall, how time can be used to your benefit, as well as the effects of possible dividends and interest rates.

The task may seem daunting, but learning this material is not that difficult. It is not necessary for you to be able to calculate option prices by hand. You simply need to develop an understanding of how option prices will respond to changes in stock price, increasing or decreasing volatility within the marketplace, the lapse of time, etc.

Stock options offer far too much opportunity to achieve significant wealth not to learn option trading methods. As you set out on that path, make sure any program you invest in provides you with the proper foundation to achieve profitability.

TheOptionClub.com assists traders of all experience levels to achieve options mastery and transition into profitable options trading.

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