When U.S. News & World Report wanted perspective about options, it contacted Cardan Capital Partners co-founder Marti Awad.
From the report:
“Options: most financial experts either love them or hate them.
“Geared toward the sophisticated investor, these complex securities can be extremely risky but offer investors the ability to speculate. Expert advisors typically recommend only investing with a small percentage of money that you can afford to lose – known as risk capital – since this type of investing carries a high risk of loss. Many companies use options to hedge against certain risks, like an insurance policy against market fluctuations or when an investor has a large concentration of company stock options.
“What are options? They are contracts that give the holder the right to buy or sell a security at a particular price for a certain period of time. Typically, one contract equals a 100 shares of stock.
“A call option gives the investor the right to buy, while a put option the right to sell. The strike price is the contractual price at which the holder may buy or sell, coupled with an expiration date, the last possible date that an investor may exercise their right to do so.”
Marti discussed “naked calls,” which she called “the riskiest of all stock option trading.” Also from the report:
“Naked calls. Certain types of options trading can be particularly risky. While the purchaser of an option can only lose the premium, thus creating a limited amount of liability, the seller of an option has significantly more risk.
That’s the case when an investor sells a call option on a security without owning it, also known as a naked call option. ‘You have unlimited risk since the stock has unlimited upside,’ says Martha “Marti” Awad, a founding partner and CFP at Cardan Capital Partners in Denver. ‘This is the riskiest of all stock option trading.’
“Conversely, when an investor sells a covered call option, a stock that is already owned, the only risk is losing the upside potential, Awad says, while the seller of a put option is at risk for the entire amount of the strike price if the underlying stock were to lose all value.”
For a look at the full report, click here.