You Can Lose It All With Apple Options
Here's an example of the correspondence I receive from burned options traders. Admittedly, most of the stories of loss reported by readers are not of this magnitude in raw dollars, but from a percentage of portfolio standpoint, I bet they're all pretty close.
I made a little money on AAPL calls over the past 3-4 months
I would say 75% of the queries I receive about salvaging sizeable losses involve Apple. At first glance, that seems a bit odd considering the fact that AAPL has been such a hot stock. It just goes to show that options, even on parabolic stocks, can be sucker bets when used improperly.
I publish a weekly Options Investing Newsletter with fellow TheStreet contributor Robert Weinstein to provide the most basic options information to investors. I tend to stress two rules repeatedly in the newsletter as well as in the articles I write. When going long an option contract:
Give yourself a minimum of four to six months' time to expiration.
Favor at-the-money and in-the-money (preferably deep ITM contracts), over out-of-the-money (particularly deep OTM contracts).
Other than carefully considered covered calls and very carefully considered cash-secured puts, this is the only strategy new options investors should use -- long-dated, ATM or ITM, preferably deep ITM, long calls and puts.
By adhering to this philosophy, you effectively take much of the confusion out of options. You remove, at least for a considerable duration, common obstacles such as time decay. An important corollary to the aforementioned two points, do not initiate these long positions ahead of major events such as earnings. This helps mitigate the potential negative impact of implied volatility. If you do anything with options into earnings, you should be selling them, but that's another story for another article.