25 August 2022

# Are you making it too complicated?

I worked on an options promo recently.

An option is something that can be traded on the stock market like any stock. But whereas a stock represents ownership of a company, an option represents the right to buy the stock at a set price for a certain period of time.

In that, a stock and its option are tied together.

In the classic scenario, if the stock goes up, the value of the option goes up.

If the stock goes down, the value of the option goes down.

Here’s a quick example.

Let’s say Stock ABC is trading at \$10. You think it’s going to \$15 soon.

You could buy the stock at \$10. If you have \$100, that’s 10 shares.

Or you could buy an option for Stock ABC that will give you the right to purchase the shares at \$10 at any point in the next three months.

If the price is higher than \$10 over that time, you can buy those shares for \$10 and sell for whatever that higher price is. Your profit is that difference.

But if the price ends lower, you don’t have to buy. You can just let the option expire.

Options usually trade at a small fraction of the stock price itself. For this example, let’s say you can buy it for \$1.00. \$100 will buy you 100 options.

Fast forward 2.5 months. The options are about to expire and you see that Stock ABC is trading at \$15. You cash in your option and buy the 100 shares.

Let’s look at the math.

If you had bought \$100 of direct stock for \$10, that investment would be worth \$150. (\$5 per share times 10 shares.)

But if you’d had the option, you’d have gained much more than that. The option allows you to buy at \$10 per share no matter what the current price. Because there is \$5 profit in every one of those options right now – and you have 100 options – your profit is \$500.

Yes, you have to take off the original \$100 you paid to buy options. But even after that, you’re still ahead \$400.

So basically, the results look like this: you could have made \$400 with options or \$50 buying the stock directly.

Same original investment (\$100) and same change in price on the stock market (+\$5 per share). But a huge difference in profit.

So, to summarize…

There are two ways to play the stock market.

You can buy a stock. Or you can buy the option that moves along with it.

If you choose the option, you have the potential to make a lot more money.

Now, could I have simplified the example above better? With the help of some graphics and a story, of course.

But even my simplified example is a big improvement on what many folks selling option-trading courses and platforms do.

They really complicate things really quickly…

They talk about the rewards, sure.

But they also try to teach everything there is to know about options right out of the gate.

For compliance (and ethical) reasons, that stuff is important.

And yes, you need to be clear that risk on options is a lot different than other investments. You need to point out that they could lose all their money on a given trade. And that it’s not as simple as holding a stock for years or even decades.

But when a buyer first encounters options, they aren’t there yet.

They want to know why they should spend their time learning about the thing.

They want to know they’re in safe hands.

Once they really understand what’s in it for them, and they trust you’re the person to help them through it, then you can give them all the jargon.

But not before. Not out of the gate.

[This principle applies to all complex sales, by the way.]