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Premium is the dollar amount of the option

аAll too often, the premium on options is higher than it should be, based on the length of time the option has remaining and the value of the underlying market. Floor brokers mark up the premiums so that they can profit. In other words, they buy their options or create their options (by taking a short position) at wholesale prices, yet they sell them to the public at retail, making money on the difference.

Time decay is the perennial enemy of the options buyer but the eternal friend of the options seller. Since the vast majority of options expires worthless, it's the options seller that makes the money, while the options buyer watches his or her trade slowly lose value over time. Unless you are timely with your options entry and unless you pay a reasonably low premium for your option, your odds of success are relatively low.

A third and equally important options concept is delta. Very few traders have ever heard of delta and fewer yet understand its implications. Delta, in simple terms, is the degree with which an options contract fluctuates with its underlying futures contract. A delta of 90 percent (0.9) means that the option will go up or down about 90 percent of the amount that the futures market goes up or down. Options with low deltas tend to be options that have a very low probability of becoming profitable unless the market makes a relatively fast and large move in the desired direction.

An option for which you paid a high premium, that is close to expiration, and that has a low delta is, therefore, highly unlikely to be profitable other than in the most unexpected of circumstances. Yet such options are low in price and often attract the unsophisticated trader. Mind you, I am not saying that money cannot be made in options trading. I am merely stating that being a buyer of options is not where you will experience the greatest odds of success. mined amount of money, the odds are that you will lose it. This is a variation on the theme of "if you buy you lose; if you sell you lose; but if you don't trade, you're missing a great opportunity.''

At first blush, the idea of futures options seems reasonable and rational. After all, since most traders lose their money by staying with a position too long or by thinking too much, the idea of a fixed loss is very appealing. However, there are three important issues that many traders fail to consider and that many promoters of options fail to address: delta, premium, and time decay.

Premium is the dollar amount of the option. All too often, the premium on options is higher than it should be, based on the length of time the option has remaining and the value of the underlying market. Floor brokers mark up the premiums so that they can profit. In other words, they buy their options or create their options (by taking a short position) at wholesale prices, yet they sell them to the public at retail, making money on the difference.

Time decay is the perennial enemy of the options buyer but the eternal friend of the options seller. Since the vast majority of options expires worthless, it's the options seller that makes the money, while the options buyer watches his or her trade slowly lose value over time. Unless you are timely with your options entry and unless you pay a reasonably low premium for your option, your odds of success are relatively low.

A third and equally important options concept is delta. Very few traders have ever heard of delta and fewer yet understand its implications. Delta, in simple terms, is the degree with which an options contract fluctuates with its underlying futures contract. A delta of 90 percent (0.9) means that the option will go up or down about 90 percent of the amount that the futures market goes up or down. Options with low deltas tend to be options that have a very low probability of becoming profitable unless the market makes a relatively fast and large move in the desired direction.

An option for which you paid a high premium, that is close to expiration, and that has a low delta is, therefore, highly unlikely to be profitable other than in the most unexpected of circumstances. Yet such options are low in price and often attract the unsophisticated trader. Mind you, I am not saying that money cannot be made in options trading. I am merely stating that being a buyer of options is not where you will experience the greatest odds of success.