May Webinar Key Takeaways: Buying & Selling

Understanding the Risks and Rewards of Options Trading: Key Insights for Buyers and Sellers 

In May, OIC hosted two webinars, Buying Options: Using Call Options as an Alternative to Buying Stock and Key Points to Know About Selling Options, led by Mark Benzaquen, OIC Instructor and Principal, Investor Education, OCC. The sessions provided attendees with the complexities of options trading, highlighting both the strategic advantages and potential pitfalls for investors. Whether you're buying or selling options, understanding the nuances of this versatile financial instrument is essential to effectively managing risk and capitalizing on market opportunities. 

What We Covered:  

The Buy-Side Perspective: Potential Gains and Built-In Challenges 

• Leverage: For buyers, options offer a compelling opportunity to invest in more shares with less capital. This is possible through leverage, a cornerstone of options trading. By purchasing options contracts rather than the underlying asset, investors can amplify their returns.  
  • Risks: However, this same leverage significantly increases risk. A small movement in the stock price can lead to disproportionate gains—or losses—underscoring the importance of thoughtful planning and risk tolerance. Trading options involves additional costs such as commissions and fees which can reduce any profits and magnify losses. 
• Strike Price Selection: The strike price determines whether an option is in-the-money (ITM), at-the-money (ATM), or out-of-the-money (OTM). ITM options are typically more expensive but offer a more favorable break-even point, enhancing the likelihood of profit. The webinar emphasized the need to align strike price choices with both market outlook and risk appetite. 
• Time Decay or Theta: Unlike stocks, options are depreciating assets. The passage of time has a negative effect on an option's value, with this decay accelerating as expiration approaches. Buyers must be acutely aware of this erosion and factor it into the timing of their trades. 
• Buying Call Options: This bullish call strategy can offer investors the potential to benefit from rising stock prices without the need to commit large amounts of capital upfront. Buying options involves the risk of losing the initial premium while subjecting an investor to the full force of time decay and volatility changes. 

The Sell-Side Strategy: Income Potential and Risk Management 

• Obligations: On the other side of the trade, option sellers have a different risk-reward profile. Unlike buyers, sellers assume obligations rather than rights. A seller of a call option may be required to sell the underlying stock at the strike price if the option is exercised, while a put seller may be obligated to purchase the stock. These obligations can lead to substantial losses, especially if the seller is not adequately hedged or prepared. 
• Income Generation: Selling options can be a powerful tool for generating income if an investor has the resources and understanding to manage the risks. Strategies like covered calls and cash-secured puts are favored by investors looking to earn premium income in relatively stable markets. It is important that investors have a solid understanding of the Greeks, which measure how various factors like volatility and time affect an option's value. 
• Risks for Sellers: Investors should understand options assignment - particularly in after-hours trading. Many investors overlook this possibility, which can lead to unexpected stock purchases or sales, often at inopportune times. Such events can incur significant losses or extra brokerage fees, making it crucial for sellers to remain vigilant, especially as expiration dates approach. While buying options can limit your downside, selling options can lead to significant losses. 
• Proactive Position Management: Monitoring positions closely around expiration, corporate events (such as dividend payouts), and market shifts is vital. Additionally, understanding your broker’s policies on margin requirements and assignment procedures can prevent unpleasant surprises and protect your capital. 

Options trading can be a powerful addition to any investor’s toolkit, but it requires a deep understanding of both the mechanics and the risks. Buyers benefit from leverage and strategic flexibility, while sellers can generate income—but both must navigate a landscape shaped by time decay, volatility, and potential obligations. Success in options trading is more than predicting market direction— it involves managing risk with precision and foresight. 

Keep Learning:  

• Key Moments From Buying Options: Using Call Options as an Alternative to Buying Stock 
• Key Moment From Key Points to Know About Selling Options 

Meet OIC instructor Mark Benzaquen: 

 

Mark Benzaquen
Mark is a Financial Services professional with 20+ years of experience with options. Mark began his career in options with Stafford Trading, LLC in 1997 before transitioning to brokerage operations with MF Global in 2000. For more than a decade, Mark was the Lead Broker for his firm in the NDX/RUT trading pit, gaining special insight into customer order flow and trade execution.