Why Options are NOT an Option
by TMF Bogey

Sexy, alluring, seductive, wild!! Words to describe a crazy weekend in Vegas? Maybe so, but also words that describe derivative products known as "options." Now, before a contingent of Fools comes knocking on my door, I am referring to all the people who buy options speculating on the movement in stock or market prices. The practice of "hedging" is another topic altogether and will be addressed at some other time. I am here to bang the Fool gong loud and clear to all the folks out there who speculate with options.

Basically, options offer the potential for big percentage gains AND big percentage losses on your money. They are very appealing to the average person because they present the possibility to make "the big score." Unfortunately, the reality is that a whopping 80% of options traders lose their money. And, while technically not considered "gambling," the everyday Fool, in my opinion, doesn't stand a chance. Here's why. . .

The most daunting reason to stay away from these beastly creatures is the simple statistic---80% of all players lose. Period. No arguments. No contests. Now, there is always one enterprising young Fool in every crowd who intends to be part of the special "20%" who actually make any money. What hurdles must he or she overcome? In order to hit the jackpot at the casino, the Wise man must pull 7-7-7, right? Well, making money in options reminds me of those three magic numbers. For ease of discussion, we'll call each "7" a different name. These three factors are "time," "direction," and "magnitude" (reminds you of high school physics, no?).

Time---Options are "time-wasting" assets. Think of the hourglass with the sands of time sliding away. Well, part of the price that you pay when you buy an option is "time." And as each day passes, you lose more and more "time" premium. The option goes down in value as time passes. So, you are in a constant game of "beat the clock" with these options. Strike one!

Direction---In order to make money with an option, you also have to be correct about the direction of the stock or index. This isn't always easy, and if you make a mistake, chances are that you'll quickly lose most of your money. If you pick "up" and it goes "down," kiss your money goodbye. Strike two!

Magnitude---assuming you are correct about the direction AND you "beat the clock," you ALSO must be able to predict the amount that a stock will move!!! Jeez! Strike three, you're out. . . of money!

In conclusion Fools, I am not a big fan of options. The only way to be a member of the "20% club" is to predict correctly the direction of the stock, the amount it's going to move, and the time frame it's going to move in. I can tell you for sure, I am NOT that smart. I think you can do a little Foolish homework, pick stocks like Dell and Micron and ride 50-100% gains without breaking a sweat! What do you think?

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