Don't Make the Dumb Money Trade on Intel, Sirius XM: Opinion
NEW YORK ( TheStreet) -- Roughly half of the articles I write deal with options. I also publish a weekly Options Investing Newsletter that targets relatively conservative long-term, growth and income investors, who like to speculate with a small portion of their portfolio.
Much of my work focuses on debunking myths and misnomers about options. Many investors never even consider using options because of the hysterical misinformation that abounds. They instantly consider options too risky, associating an options trade with little more than gambling. I have a theory as to why this is so.
With few exceptions, most basic options information flat out stinks. There comes a point where you can provide a novice with too much information. It's tough enough to wrap your head around the basic functions of calls and puts the first time you encounter them, let alone understand the nuances of implied volatility and the Greeks.
I am not saying these things do not matter or that people who use options should not learn them; however, to get started using options in the most basic fashion, you do not need to get bogged down in complexity.
In addition to information overload and the confusion it triggers, humans have a tendency to do too much too soon. We also desire instant gratification. If you're bullish Intel (INTC) , for example, you might be the type of person to psyche yourself up about buying deep out-of-the-money calls because you think the company will blow the doors off of the next quarter.
Sirius XM (SIRI) is really the best case in point, as are other sub-$5 stocks. Scan the message boards on SIRI. You will see countless bulls scoreboarding about how many $2.50 and $3.00 calls they own. The same phenomenon ran rampant when Citi (C) was flirting just shy of the $5 marker pre-split.
We often want to go for what we perceive as the big score. And if an OTM call costs so little, we ignore the reasons why it is so "cheap" to focus on the massive percentage returns we can realize if the underlying stock hits our obscene and baseless price targets.
Before you know it, things like implied volatility and time decay have an impact and your once "cheap" OTM call is now worthless. You have no idea what hit you. That's because you (A) received bad or far-too-ambitious information and (B) you had no business being in a trade -- fueled by emotion -- that you did not understand. The result, you rationalize what happened and make more bad trades, or you cast off options all together and move on.
It should not, and doesn't have to, be that way. If you get into the proper trades in the first place, things stand a much better chance of going well for you. For beginners and beyond, the best options trade is the one with the fewest things to have to think about.