Ask a Trader: Do You Need to Know the Greeks to Trade Options? – T3 Live
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Ask a Trader: Do You Need to Know the Greeks to Trade Options?

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In today's edition of Ask a Trader, Mark Melnick assists a reader named Travis with some options trading questions.

How important is it to learn the Greeks to trade options? Do you really need to know all the math?

And just how risky is options compared to stocks?

-Travis

Hi Travis,

Thank you for the question.

The importance of the Greeks depends on what type of options trading you are doing.

If you are longer-term oriented, or if you are trading more complex strategies, you will need to understand the Greeks like delta and theta.

But for my style of short-term intraday and overnight options trading, I trade options as if I were trading stocks.

I buy calls if I think my stock will go up and I buy puts if I think the price will go down, and I've had great success with my method.

People often think options are very complex and riskier than stocks.

I am here to debunk that myth once and for all

For example, if you wanted to buy 100 shares of a $100 stock, you would have to put down $10,000.

Let's assume a stop loss of $99.50 with a profit target at $101.  So you're risking $50 to make $100.

Instead of doing that, I'd rather pay 25 cents each for 2 call options. If the stock dropped the $99.50, the price would drop to 15 cents. And they might climb as high as 70 cents if the stock went to my $101 target.

In my example, I used call options to risk $30 to make $90.

My 2 calls at 25 cents each only cost me $50 (2 contracts X 25 cents X 100)

With stock, I would have risked $50 to make $100.

Now let's say I wanted to take this position overnight.

This puts me at a severe overnight event risk.

If an analyst downgrades the stock — or if there's a big market event like the Brexit — your $100 stock can open at $95, putting me down $500.

If the $50 of options became worthless, that would be my max loss.

I'd rather risk $50 than $500.

Yes, you may lose 100% of your bet with options, but if you risk a predefined amount, you will never lose more than that, ever.

With stock, risk is open-ended.