There are two parties in every options trade: a buyer and a seller, also called a writer. Buyers buy options, while writers create options and sell them to buyers. The key point to keep in mind is that option buyers as a group lose money over time, despite occasional lucky trades. At the other end of the table, options writers as a group make steady money despite occasional losses.
Dr. Alexander Elder in The New Trading for a Living
Dr. Elder goes on to say:
“The simplest and easiest approach to options is to buy them. That’s exactly what beginners do, and unless they learn quickly and change, their accounts are doomed.”
“A stock … can do one of three things: rise, fall, or stay flat. When you buy a call, you can profit only if the market rises; you lose if it goes down or stays flat. You can lose even if it rises, but not fast enough. An option buyer makes money only if the market goes his way at a good enough speed, but loses if it moves his way slowly, stays flat, or goes against him.”
“An option buyer has one chance out of three to win—but the odds are two out of three in favor of an option writer. No wonder the pros write options. A pro sells a call, and if a stock drops, stays flat, or even rises slowly, that call will expire worthless, and he’ll keep the premium. He sells poor buyers hope—and as that hope turns out to be worthless, he keeps their money.”
“Options attract hordes of small traders who can’t afford to buy stocks. To get a bigger bang for their buck, they buy calls as if those were substitutes for stocks. This doesn’t work because options move differently from stocks. Gullible amateurs buy empty hopes, which the pros are delighted to sell to them.“
“Beginners, gamblers, and undercapitalized traders make up the majority of option buyers. Just think of all the money those hapless folks lose in their eagerness to get rich quick. Who gets all that money? Some of it goes for brokerage commissions, but the bulk flows into the pockets of option writers. Well-capitalized professionals write options rather than buy them.”
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