Let me tell you something so unbelievable you'll think I'm nuts...
It is possible to never lose money with options.
Seriously! Check this out... in the right situation with the right stock and the right amount of patience you can work yourself right out of a loss and into a winner.
How do I know? Because I just did it!
OK so follow me, back in March I sold to open a TWTR June $47 put. I collected a $465 credit on just one contract. So what does that mean? Well, it means that if TWTR is trading BELOW $47 come June expiration I'll have to buy 100 shares at $47! However, that was never my plan. My goal was to simply catch a rebound in TWTR. So as the stock bounced back up, the value of the put would drop allowing me to buy it back in for a profit.
Well, we all know what happened - the lock-up expiration came and TWTR tanked, dropping below $30 for a short time intraday. At one point I think I was down like $1,100 in the position.
So come early June I was faced with 3 distinct choices....
1) Buy the put back in for a HUGE loss.
2) Say screw it and let the 100 shares get put to me. Keep in mind I would've been holding shares averaged in at $4235 ($4700 - the original $465 credit) when the stock was trading at like $32. So I'd have been way underwater.
3) Roll it out!
I chose #3. So here's what I mean when I say "roll it out"
On June 12th I bought back in my $47 June put, closing the position, and at the same time I sold open a September $44 put. This trade cost me $150, so it was a debit spread. Now remember I had an original credit of $465. So after this debit, I still had $315 of credit left. Plus I had just bought myself some more time and a better strike.
Then yesterday happened, and TWTR gapped up 20%! I took that opportunity to close out my September $44. I bought it in for $180, leaving me with a final profit of $135!
Obviously this took a great deal of patience and a dang good ER, but the magic is when you're wrong you can "put off" the loss until you're right. I'm sure there are situations when that's not possible, but I haven't run into one yet.
The downside is that you tie up capital for longer than you may have intended. So there's "opportunity costs" involved in rolling positions. For example with TWTR, I tied up $4700 of capital for roughly 4 months and all I got was $135, or a 2.9% return. There's the rub. For some people it would have made more sense to take a loss and move that capital elsewhere.
Either way, I'm glad to be out of this position... with a PROFIT!
FULL DISCLOSURE :: Obviously options are VERY risky and you CAN lose LOTS of money. I'm not trying to suggest they're free of risk. It's definitely possible to lose money in options, because I've lost a lot of it. This post is simply an effort to show a real-life situation.