I used to have a love/hate relationship with options. Some of my biggest gains of all time came from options but likewise some of my larger losses as well.

For market newbies, stock options are basically derivatives based on the current price of a particular stock. "Call" options give you the right to buy a stock at a certain price for a fixed amount of time while "Put" options give you the right to sell a stock at a certain price, also for a fixed amount of time.

Example:

You're interested in IBM and the current price is $200. You could buy a call option that lets you buy IBM at $205 a share. So if IBM moves up higher than $205, your option will start making money since you can still buy the stock at the lower price of $205.

Options are less expensive than buying the stock outright, so that's a positive. Another positive is your risk is limited to the purchase price of the option versus the full value of the stock. At $200, owning 100 shares of IBM would cost $20K and that would be the amount at risk is IBM should tank. The same $200 option might cost only $350 for a 1 month expiration. If IBM should have a disastrous earnings announcement, you are only out $350 while the stock owner could be out much much more.

The biggest negative with options is that if the stock doesn't move as you intended, they could expire worthless. Another annoying negative is the bid and ask difference is usually much wider, which will cost you a bit in in transaction costs than you'd pay trading stocks.

But overall, there are ways to use options that will allow you to enjoy profits if the stock moves in your anticipated direction while limiting your risk, which is the best of both worlds. Now that my timing has considerably improved,  I see potentially big benefits incorporating options into my trading strategies.

Last week, Green Mountain Coffee had a bad earnings report and dropped 25 points after hours. I saw the following message from a trader on Stocktwits:

" I was long 1200 share tonight. I feel like throwing up in my trash can in my office. Over $24K out the window!"

Proper use of options would help one avoid experiencing such a nauseating fate.

This also shows how day trading is LESS risky than holding overnight.

CRM, a stock I shorted way too soon that has caused me nothing but problems by its rocket moves upward during the last few months has finally seen a major down day today, closing the day down about 15 points including after hours trades. The stock actually began its descent back to earth last week, but the moves have been steeper and more dramatic this week.

As a hint to how bad this trade was, despite plunging more than 25 points since last week, I'm still in the red...doh! I'll need a few more down days before I'm in the profit zone. It is nice however, to see the money that was allocated out to support the big move against my position rushing back into my account.

The other short position thorn in my trading side, Amazon (AMZN), has proven to be more elusive and was still moving up today, but its movement suggests it's tired and will soon be falling as well.

This is turning out to be a good lesson in market timing on the daily charts rather than the intraday charts- although so far the lesson has been more focused on what NOT to do....haha.