Ordinary options - risky or not?

I have recently been reading about a little of the basics of options trading.

Okay, so an option is basically one of the following:

- A contract between a buyer and a seller where the seller promises to sell stock at a particular date, for a particular price, known as the strike price. This is a call option.

- A contract between a buyer and a seller where the seller promises to buy the stock at a particular date, for a particular price, known as the strike price. This is a put option.

Okay, now we have that bit out of the way. So why bother? The real reason could be leverage. You put down some money for the option, at the time you buy, and then when the stock goes up for a call option to a price above the level of the strike price, you can buy stock at a discount. That sounds great doesn't it? Damned right it does. Here's the deal though, can you reliably predict that the price will move in a certain direction? That's pretty tough isn't it? But there is more! Can you also predict the minimum price that a stock will reach, reliably, and repeatably? Then there's the premium that you would pay, as the buyer, can you further predict that the stock price is going to move in the right direction, to a price that is the premium above your stock price, reliably and repeatably? And here lies the problem. I know I wouldn't be comfortable with attempting that great feat. Obviously you can see that the leverage, and big rewards are possible, and with that comes the much higher risk.

The put option is the same, but the market moves in the opposite direction, and you would instead be betting on a bearish market.

You need a strong stomach to participate in that market, for sure. Interesting to see how it all stacks up though, isn't it?

Covered Calls

A covered call is where someone requests to buy a stock at a particular date, for a particular price, and for that favour, 
the option writer gets a fee.  This fee effectively lowers risk as a covered call writer, the stock 
can go down by as much as the fee for that share below the buy price before you reach break 
even, and potentially lose money.  The profit potential is the promised price (strike price) 
minus the price paid when the stock was purchased, plus the fee.  Sounds pretty good to me 
too, I have to admit.  The only downside is if the stock drops below breakeven, you're stuck 
with a stock that could be losing you money.  Still, it certainly seems like something worthwhile 
considering doesn't it?

There are two types of covered call, a put and a call.  A call is something that you would do when the price is going up, and a put is what you would do when the price is going down.

I then got thinking about this, and thought that if you combined it with a value stock, even if that did happen, it wouldn't be the end of the 
world since you believe in that stock, if the company fundamentals still stack up.

So you'd only really want to do a call with a stock that you were fairly certain was going to go up, to amplify your gains.  If stock goes down, I don't think that this is the place to be when it does.

There's also the downside that if the option is exercised and your stock is a value stock, then whilst you made a profit, you also lost your valuable stock, which may limit what you earn.  Thining further on from that, you could probably buy back your position with more shares, so long as the call didn't occur during a major move.

Now, the opposite side of the covered call, is the person who wants the stock at a particular price, that's kind of like buying insurance, if you think about it?  You expect the price of a stock to get to a certain level, and you want to get it at a discount.  I guess it would be a way to purchase more stock in a bullish market (one where the price is going up) at a discount.  If you were to do this, then you could minimize the buy price of a stock to the strike price plus the premium fee, and could invest funds in another stock until you exercise the buy.  This process limits the risk to the premium fee, and allows an unlimited growth.  This really is insurance.  So if you can get a stock at a price that when added to the covered call premium is still less than the value of the stock, you're onto a winner, since you limit your risk for buying more shares without tying up money.