Answering Your Options Trading Questions - Cabot Wealth Network

Answering Your Options Trading Questions

Options trading can often be dismissed as too risky or too confusing. But it's time to expose some of the five biggest options trading myths.

options terminology: What are Options in Investing?

In my advisories, Cabot Options Trader and Cabot Options Trader Pro, my primary focus is making money for my subscribers. But my secondary goal (and a goal that I love) is to take beginner options traders to intermediate level options traders, and intermediate level to pros. How do I do this? I write options education pieces and constantly press my readers to ask me questions about options trading.

I invite you to post any questions you may have about options in the comments section below this story. Don’t be scared. Like your third-grade teacher told you, “There are no stupid questions.”

Too many investors think of options trading as gambling, or an exotic derivative that only Harvard and M.I.T. mathematicians can understand. That could not be farther from the truth. I truly believe that any investor who’s willing to commit to learning from an experienced trader will soon find that trading options is not gambling.

Some of the savviest, most seasoned investors are still clueless when it comes to options trading. Others know the basics of options, but are skeptical about the perceived risks that accompany it. Sadly, that skepticism is rooted in a fundamental misunderstanding of how options work.

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That misunderstanding precipitates bad information, and that bad information has been repeated so often among options detractors that at a certain point, it became myth.

It’s time to identify those myths … and expose them.

Myth 1: Options trading is too risky.

It is true that options are risky if you don’t know what you’re doing. But with a little education on the subject, options trading can be as safe as you want it to be. When done right, the whole point of options is to reduce risk.

Options are all about probabilities, which enable you to choose your level of risk in a trade. For example, if you want to play it safe and hit “singles”—i.e., go for modest returns that eventually add up if you string enough of them together—you can choose a trade that has an 80% probability of success. If you’re willing to take on more risk by going for home runs even if it increases the chance that you’ll swing and miss, you can reduce your probability of success in exchange for a much bigger payoff.

So really, the notion that options trading is risky is only part myth. Options trading can be risky … but only for the uninitiated. Which brings me to myth No. 2 …

Myth 2: Options trading is too confusing.

It’s true that trading options is more complex than buying and selling stocks. Options comes with its own vernacular—covered calls, selling puts, the strike price, iron condors, etc.—and that requires some getting used to, but it’s not like learning how to split the atom. Like most things, options can be learned easily if you’re willing to put in just a little bit of time.

Once learned, the options-trading process will quickly become second nature. You don’t have to be a seasoned professional to trade options. There are plenty of self-directed investors who picked it up and now trade options regularly. You can too.

Myth 3: You need a lot of money to trade options.

Not really. For most trades, you don’t need more than $1,000 in capital. And why is this? Because the most powerful factor of options is the leverage you get when buying calls and puts. For example, instead of paying $5,000 to buy 100 shares of stock XYZ, with options you can pay $200, and have the same upside potential as if you had bought the stock.

But whether if you have $1,000 or $100,000, you should plan on allocating between 2% and 5% to each trade. By not risking too much on any one trade, and with the awesome potential of the leverage that options allows, you should theoretically get more mileage—and hopefully more profits—from your options money than you would if you invested that money in 10 stocks.

Myth 4: Options require a bull market.

Not necessarily. Through the magic of puts, you can still profit even when the market begins to fall. In traditional investing, the average investor can’t outright short the market by selling stocks or indexes short because of the unlimited upside risk. However, puts allow options traders to gain bearish exposure at a fraction of the cost. A put purchase is used when a decline in the price of the underlying stock or ETF is expected.

For example, if you expect stock XYZ to fall, you could buy a put at a specific strike price with unlimited potential for profits. The maximum loss on the trade is the amount of premium paid. For example, the purchase of the XYZ 100 put for $1 would only risk the $1 paid. If the stock were to close at $100 or above at expiration, the put would expire worthless, and your loss would be limited to the $1. However, if the stock were to go below $99, the holder of this put would make $100 per contract purchased per point below $99. By purchasing puts, you can take advantage of a down market with low-risk, high-reward trades.

Myth 5: You can only trade options on stocks you already own.

Wrong. The beauty of options trading is that you’re not limited to the stocks already in your portfolio. An option is a contract that conveys to its holder the right, but not the obligation, to buy (in the case of a call) or sell (in the case of a put) shares of the underlying security at a specified price (the strike price) on or before a given date (expiration day).

Bottom Line

The advantage of trading options is that, unlike buying stocks, you can define your risk ahead of time.

When you buy an individual stock, you put a relatively large chunk of capital to work, which exposes you to the occasional bombshell, whether it’s a bad earnings report, a big drop in the market or a random company-specific event that brings out the sellers.

Options, on the other hand, give you the opportunity to get exposure with limited capital. If you know what you’re doing, you can make trades that have a 60%, 70% or even 80% probability of success. And options allow you to be more aggressive too—you can take on more risk to potentially earn a bigger return.

And your risks are clearly defined ahead of time in a way that’s impossible to duplicate through pure stock trading.

What options trading questions do you have?

Jacob Mintz

Quick Profits, Controlled Risk

Jacob Mintz is a professional options trader and Chief Analyst of Cabot Options Trader. He uses calls, puts and covered calls to guide investors to quick profits while always controlling risk. Beginners and experts alike can gain from following Jacob’s advice.

Learn More

*This post has been updated from an original version, published in 2018.


  • When you look at an options chain, why is the probability of touch different for calls vs puts for the SAME strike price and expiry date? Thanks.

  • I’m playing around with a Put Spread strategy where I buy a put that is in the money, then writing enough puts to cover the cost of the put, creating “free” profits. The Puts that I write would be way out of the money. This should keep me at break-even if the market goes up & should make money in the window between the 2 strike prices. Here’s an example I plugged into Options Profit Calculators website purchasing 1 Put option & January 31st expirations. Is this a viable strategy? Or is there too much risk should the market crash to a level below the written puts?

    • Jacob M.

      I think that is a fine strategy, as long as you know where your risk is. That downside risk, in the case of a crash, should be your number one concern.

  • Sai K.

    Hi Jacob,

    Hope you are doing well. I have a question regarding options. Let’s say for an option there is the open interest of OI= 10 and have volume = 1000 where did the extra 990 contracts come from(does any system generates these new contracts)? and also does the open interest change to OI = 1010 the next day? Is that how open interest works?

    Thanks in advance

    • Jacob M.

      Per you example, you see a volume of 10 and open interest of 1000. The volume is just what is traded (contracts) for that particular trading day, whereas the open interest is what is currently active (open or outstanding) for that expiration cycle at that specific strike price. Volume is calculated in real time and open interest is typically calculated at the end of the trading day.

      • Sai K.

        Thank you for the reply, Jacob.
        Yes, you are right volume is on that particular day and OI is currently active one’s. but my question is for an option that has 0 open interest and with volume = 1000 where did the 1000 contracts came from when there are 0 open or outstanding contracts. I mean how new contracts are generated when there are none. Does any system take care of generating new contracts in the event of 0 open Interest?

  • When exercising a put option, can you own the 100 shares of the stock through a different brokerage firm from the one through which you bought the put? Or is that problematic? I want to create a protective put for stocks that I own, but the brokerage firm that I own the stocks through (Vanguard) isn’t really oriented towards options trading. Lots of hassles trading options through them.

    • Jacob M.

      In order to exercise that put option, and then go short the stock, these positions need to be in the same brokerage account. Personally, I trade options through Interactive Brokers. That being said, there are many online brokers that are also very good.

  • “Dumb question” – simple answer?

    I’ve been trading options for a while, pretty successfully (beginners luck!), and was explaining the basics to a friend. He posed a question that I (disturbingly) couldn’t answer…

    I buy a call.
    There are 3 possible outcomes:
    1) It expires worthless at expiry.
    2) I exercise the option,
    3) I “sell” (trade/close out my position) on the option for a profit or loss before expiration.

    His question focuses on #3.

    Suppose I sell my option for a profit before expiry.
    I am selling the right to purchase the stock for the strike price blah blah blah…

    It isn’t me.
    I only purchased a right, not an obligation.
    Once I’ve “sold the call”, I record my profit or loss and I’m done.

    Even referring to it as “selling a call” seems wrong.
    Selling naked calls is a dangerous strategy…

    I hope the question is clear…
    I’m hoping for a simple resolution!

    • Jacob M.

      The simplest answer is big picture it doesn’t really matter, and you never will know.
      For example, when you sell that call the trade is made with another trader, likely a market maker, and this trade is cleared by the Options Clearing Corporation. It is then on that trader to manage the position, and if they do exercise at some point, again the OCC will handle that transaction.

  • Nick L.

    Hi Jacob, I’m a subscriber to the growth investor and would like to try options. My question is , will Robinhood with options work for your service? I haven’t really messed with it because I’m still in line.
    Thank you

    • Jacob M.


      I don’t see why RobinHood’s options wouldn’t work. So yes, it should work.

      Let me know if you have any issues, though not a lot I can do in terms of their trading platform.


  • Daniel D.

    I’m interested in any guidance you can give on purchasing OTM leaps on growth stocks. I also subscribe to Cabot Growth Investor. One recent pick from that service is SPLK which has performed well. If I wanted to purchase options in the Jan 19 or Jan 20 series, for example, what is a good delta to choose? Should I try to limit the option cost to a certain amount, say $200 or less since these options would be almost all extrinsic value? And what might be a good mix for stock combined with options (not covered calls)? For example, allocating $5,000 to stock and an additional $500 to options, which might be two leaps at $250 each? Thanks for the opportunity to ask, I know adding options for a good growth story could be very profitable, but I don’t yet have a good plan for executing on this approach.

    • Jacob M.

      Daniel, buying Leaps on growth stocks is a great strategy. Cheap way to get exposure. I wouldn’t say there is any rule that you have to stick to. Typically, I buy calls a bit out-of-the money, especially if I already own the stock. In the case of SPLK if it were me, I might look at the January 110 or 115 calls.
      In terms of capital in a trade, that is totally a question that needs to be asked of yourself. How much do you like the stock etc? My rule is 2-5% of options trading capital in each trade.

  • David S.

    So far, I’ve done quite well with selling puts and covered calls. But, buying puts…man, I usually manage to buy a put and then the stock just stands still or perversely, goes up. I need help in this dept!

    • Jacob M.

      David, buying puts in a bull market is tough. You really need to nail the timing, and the right stock. If your buying puts to hedge a portfolio, then you want to lose on those puts. If your trying to short a stock via puts, its tough in a strong market. If you ever want to run an idea by me, feel free to email me and I can try to help. Jacob

  • William W.

    I recently was switched from Scottrade to TD Ameritrade which has the Think or Swim platform. In the past I only bought calls 90% or puts 10%. I’m finding the platform a bit intimidating. I’d like to use some spreads to manage my losers. I like the weekly options or sometime I’ll buy a long term call option to help build a position in stocks I like. Thanks in advance for any comment you may make. BTW: I’m a Emerging Markets subscriber and have enjoyed Paul Goodwin for a long time. Thanks again. jbnaples

    • Jacob M.

      Some of these platforms are not great. I use Interactive Brokers, and while the commissions are cheap, the platform stinks. My advice is take one or two of their free webinars to get better acclimated. It’s annoying that it takes time, but in the long run, probably a good use of time. Also, I like long term calls on stocks you like. Great way to get exposure for a fraction of the price.

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