This is a continuation, if you have not read the first part on the Basics of Options Trading, do check it out.
In the first part, we learnt how Options is a complicated instrument. Its prices unlike stocks are determined by several factors that can easily swing from one end to the other.
As such, is it not surprising that Warren Buffett, one of the most successful investors of our time, has urged investors time and time again, to stay away from options and other forms of derivatives.
Here’s a snippet from the Berkshire Hathaway 2008 Annual report on Warren Buffett’s view on derivatives:
Derivatives are dangerous. They have dramatically increased the leverage and risks in our financial system. They have made it almost impossible for investors to understand and analyze our largest commercial banks and investment banks…
A normal stock or bond trade is completed in a few days with one