Budding option traders begin their derivatives adventure with simple strategies. Which is entirely logical of course. Milk before meat, as they say. Step one is learning how to buy calls and puts. Most traders are all too happy to master option buying.

It’s sexy.

Think of all the attractive qualities you tap into when you buy an option. First off, they’re cheap. Which is a characteristic all the more alluring six years into a bull market when most stocks have ascended into the triple digits.

Since the cost of an option equals the risk of your position these contracts limit your liability should things turn sour.

The second powerful attribute is leverage or the potential to generate outsized returns. This particular advantage tugs at the inner gambler in us all.

Capturing a 100% gain on a small increase in the stock is the ultimate score.

The promising pull of leverage and limited liability sucks you into option buying and before you know it you’ve been robbed, beaten, and left penniless.

Yes, I’m exaggerating. Kinda.

Curse you long calls and puts! So much promise, and yet so difficult to master. Why do so many traders find churning out consistent profits with option buying so hard? Because it is! It’s more difficult than most realize.

‘Tis a problem of 3 dimensions.

Stock traders live in the land of a single dimension. Every day it’s the same question, “up or down?”  It’s very binary. Buy a stock and if it rises you win. If it falls you lose. Simple. When being introduced to options we usually equate long calls to long stock and long puts to short stock. Which is an okay comparison but a bit misleading, an oversimplification.

With options two additional questions enter your vocabulary: “how far” and “how fast”. Magnitude and speed, in other words.

These two extra dimensions are what make option buying more challenging than stock trading. You don’t just have to be right on direction, but also speed and magnitude. If you buy AAPL stock all it has to do is rise and you win. If you buy an AAPL call option then AAPL stock has to not just rise, but rise far enough fast enough or you lose!

If it rallies quickly, but not far enough you lose. If it rallies far, but not quick enough you lose.

Tricky, tricky.

It’s not impossible, mind you. Just a touch more difficult than what you’re used to as a stock trader. So don’t get discouraged if your option trading ventures aren’t as successful as you hoped right off the bat.

As the hip high school kids say these days – the struggle is real.

If it were me, I wouldn’t dwell in the land of option buying. I would play around with long calls and puts long enough to learn the dynamics and then move into option selling.

But that’s just me and what do I know?

Financial freedom is a journey

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