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Though I wrote the following 25 years ago, it still holds true today.

I feel compelled to post my opinion again as I see more and more purveyors, no, predators merchandising options as a means for new investors to make 'easy' money in the financial markets if they will do as they are told; introductory fee, a course, a seemingly complete yet simple red-arrow, green-arrow, options made easy type software program demonstrated to work through the illusions of Investment Technical Analysis, Backtesting, and the Argument by Exception (exceptions being presented as the rule) for a fee, another fee, another course, and yet another fee, a big one, for yet another 'really, really' advanced course.

I understand the allure; I buy, only buy, puts and calls on occasion -because I know in advance my loss potential in advance, the option premium.

Though the possibilities are captivating for most people, most of the time a trip to Las Vegas would be a better investment; at least you get a room, great food, the best entertainment in the world, and the casino may 'comp' everything; if you win or lose.

Keep in mind, if options are so easy and so very profitable, why are the representatives of so many Websites 'selling' you to trade options when they could just be 'buying' options themselves while jet-setting to their yachts?

As many investors have to earn their money the hard way and then insist on losing it by taking the nonexistent 'options' road to instant wealth, I submit the following for your consideration with the hope that you will proceed with care and caution.

Options

Individual investors' failure to perform most often occurs because the conscientious do not know the questions to ask to distinguish between good and bad investment advice, the naïve look for investment shortcuts and instant gratification investment solutions, and the reckless confuse knowing what an investment strategy is and how it can work with being able to make it work successfully.

Such is the case for options.

Options are not suitable for most investors.

Options are best for the 'action' oriented speculator who understands that options are much closer to gambling and not remotely related to investing; with the exception of Covered Call Writing; as mentioned below.

There will be gains and losses and lots and lots of commissions.

Options have three major characteristics:

Options Markets

Keep in mind, when you buy an option, someone is selling this option to you.

The sellers of options use some 90 factors to determine the appropriate price for an option.

The seller will most often know better than you what the probability of a price move of a particular stock will be over a specific period of time.

You not only have to anticipate a price move when buying an option, you must realize an unusual, often extraordinary price move in order for your option to work because time is always working against you.

Commissions in and out can be 3%-5% each way, a spread between the bid and the ask of 5%-10% sometimes 20%-30%, a slight decline in price after purchase, and running out of time put you at a major disadvantage from the start.

When options are to be used, purchase options that are well in the money (strike price below market price) with at least 90 days before expiration.

Buying out of the money, short-term options, done on a routine basis, with very rare exception, is felony stupid.

The most common side effects when using this product are headaches, dizziness, and abdominal pain.

Continued use most often will result in nausea and occasional twitching.

Don't do options.

Well, maybe every once in a while!

Naked Options

Naked option writing, writing naked calls or naked put options occurs when the investor, no the trader, no the masochist writes calls without having either a long position (to protect the naked call) or writes puts without having a short position (to protect the naked put) in the underlying stock.

Example: Write ten naked calls with a strike price of $20.00 (the buyer has the right to call the stock away from you at a price of $20.00 a share). The stock then goes to $100.00 a share and you have not covered your options (bought the calls back in the open market) as the stock moved up.

At expiration, you must buy 1000 shares of stock on the open market (100 shares for each option sold) for $100.00 or $100,000.00 and deliver it to the investor who bought your calls (called your stock away) and he gives you $20.00 a share or $20,000.00 for the 1000 shares. The investor made $80,000.00 on the trade. Guess whose $80,000.00?

In short, when selling naked calls, the loss potential is infinite.

Example: Write ten naked puts with a strike price of $100.00 (the buyer has the right to put the stock to you at a price of $100.00 per share). The stock then goes to $20.00 a share and you have not covered your options (bought the puts back in the open market) as the stock moved down.

At expiration, you will be put the stock (at a price of $100.00 a share) for 1000 shares at a cost to you of $100,000.00. Because the stock is only trading at $20.00 a share and 1000 shares is worth $20,000.00, you have another $80,000.00 loss. Your total potential loss is your $100,000.00 should the stock go to zero.

Many of the conservative investor victims of the market crash of 1987 lost everything while writing naked puts as a means to enhance portfolio income while never quite comprehending or believing that it was possible that they could/would lose everything.

I fail to see the humor in or the potential for this investment strategy just to generate more investment income.

Cover the puts, you say!

On the day of the crash, you never had the chance!

PS: If anyone ever verbalizes the words 'naked options' to you, make a citizen's arrest.

Covered Call Writing

Covered call writing, the so-called conservative side of options, seems more to be yet another way to create commissions than to offer long-term benefit to the investor.

It is a very subtle technique to make long-term investors think and act short-term.

An investor buys an equity because he or she believes it will appreciate in value over time.

If that same investor then writes covered calls against the equity held (when the equity begins to do what you wanted it to do when you first bought it, go up) it is called away.

Advisors will often suggest covered call writing to create more commissions, excuse me, I mean more portfolio income.

However, if the equity you own for which you have written a call goes up or down prior to option expiration, the option premium received is actually return of your principal.

If the stock is down at option expiration, the option income simply reduces the amount of short-term capital loss.

If the stock is up at option expiration, the option income represents a portion of the principal you would have had if you had not written the covered call in the first place.

If you need income, buy income-producing investments!

Advisors will often suggest covered call writing to hedge the portfolio against market decline, short-term or long-term.

Advisors actually suggest covered call writing to hedge their incomes in market decline; when investors have many unrealized losses it is difficult to generate commissions.

Authors will often suggest covered call writing as a means of generating income and building wealth.

The success of the premise depends on what I call 'Duh' investment theories.

They all start with the word if:

It works if… You can do it if… You will make this much money if…If this stock goes from $10.00 to $20.00 a share by tomorrow, you will double, possibly triple your money. Duh!

Logic lovers, all of this is nothing more than the argument by exception; suggesting that the exception is the rule.

Now the 'if' in itself is not the problem.

The stock market itself is also one big 'if.'

The problem is the amount of time in which the 'if' must happen.

However, 'if'' is shrinking more and more rapidly the closer the expiration date.