That strategy is pure gambling according to Jay Kaeppel, author of The Four Biggest Mistakes in Option Trading. The four are 1) relying solely on market timing to trade options, 2) buying only out-of-the-money options, 3) using strategies that are too complex and 4) casting too wide of a net.
Options and futures originated in the 17th century in the Dutch Republic to provide farmers a way to protect themselves against falling prices at harvest time and as a way for processors to protect their businesses against shortages caused by drought or disease. Options are still a good way to protect all kinds of assets, including shares of stocks. For example, a simple strategy for protecting one’s nest egg from a market collapse is simply to buy put options on an index of on the stock of specific companies. If the market declines, the option should increase in value enough to make up for the loss in the stock portfolio.
