08 Dec Quick cash… with options?

Q. I’m interested in option trading. What is the best way to start? I have heard of this can be done safely without a need for a lot of money. A few of my friends are doing it and are happy with generating $300 to $400 a week.
— Tempted

A. You’re right that you need an education before you delve into something like trading options.

First, slow down.

“The prospect of making $300 to $400 a week safely sounds great, but as the old saying goes, ‘If it sounds too good to be true…'” said Anthony Vignier, a certified financial planner and attorney with Vignier Investment Group in Kearny.

You need to first understand options and how they work, and then decide if this investment strategy is right for you, Vignier said.

He said there are dozens of books on the subject and most brokerage platforms also have tutorials on how to invest in options.

“In its basic form, an option is a contract that gives a holder the right, but not the obligation, to buy or sell an underlying stock in a company at a specified price on or before the option ends or expires,” Vignier said. “When you buy an option you are buying a contract, which ends at some point.”

This means that if you don’t exercise the option or sell the option before it expires, you have nothing, he said. You lost the money that purchased the option.

You mentioned safety, and if safety is what you’re looking for, forget options.

“Options are tools, and they’re only as good as the people using them,” Vignier said. “A novice using them can ultimately get burned.”

Consider the risks. And there are many.

He said with some options, you have the potential to lose what you invested and more beyond that. Also, because options are derivatives, there are accounting and tax concerns that can affect you, so speaking to your tax professional about option trading is a consideration.

Be sure to consider how trading options could work with your overall portfolio, and that means looking at how much risk you’re willing to take with your money.

“Finally, be very careful of advertisements on the internet promising to make you rich using options. Most are scams,” Vignier said. “Your best bet is to make sure you understand options and the risks involved before you delve in, otherwise what you’re doing is gambling, not investing.”

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This story was first posted in December 2015.