1) Fiction: Options are a very versatile product. While they can be very speculative, they can also be used to hedge an existing portfolio, to provide a steady income, to diversify and spread risk, and there are also ways to use them to profit in any type of market. Also, even when options are used in a speculative way, the amount of risk can be predetermined and limited.

2) Fact: The sad truth is that most options traders do lose money. The key then is to learn more, which you're doing here at Online Trading Academy, and to work smarter and harder than the competition. In other words, there's a lot of competition in the options market and therefore, it's not easy to make consistent profits with minimal risk, but it is possible, and you can do it.

3) Fiction: A 2005 study by the Options Clearing Corporation showed that 48% of option contracts are closed prior to expiration, 17% are exercised, and 35% of options expire worthless. The argument that market makers generally are short options is true. However, think about what a market maker does. He trades with the public. Since most of the public is more comfortable buying options, the market maker naturally becomes short. You can be sure that if a market makers' inventory becomes too short, he will increase his bids to induce the public to sell options back to him. Being too short means not being able to sleep at night. Been there, done that.

4) Fact: When trading options, no money is created. So if you add up all the gains of winning options traders, it will equal all the losses of losing options traders. However, when you include stock trades and hedges in the calculation of the gain/loss, it is possible for total gains to be greater than total losses, or vice versa.

5) Fiction: Generally, you will only be assigned if your short options are deep in the money and already trading like stock. Granted if you're not expecting the assignment, there might be a cash flow issue, but that can normally be resolved upon hearing of the assignment on the next business day. Also, there are some strategies, like selling puts for example, where the objective is to be assigned.

6) Fact: Actually, with options it's very easy to put together trades that have a high win rate. But be aware, if a trade has a win rate of 95%, there may be a bomb waiting to go off in the remaining 5%, yielding an overall negative expectation for the trade. An example of this type of trade would be to sell short term deep out of the money puts on an index. You'll win most of the time, but when you lose, it can hurt big time.

7) Fiction: If only it was that easy! In a sense, options are priced by supply and demand and in accordance with the markets prediction of future volatility. In other words, if the market predicts that a stock is becoming more volatile, the options will be priced to reflect that prediction. There is no free money in the options markets.

8) Fiction: Low priced out of the money options are the options traders' equivalent of lottery tickets; high return, low probability. Serious traders don't consider that a business.

9) Fiction: That's certainly how a stock trader would think, but not necessarily an options trader. Options traders think more in terms of spreads. So, I wouldn't mind buying a Call option on a stock I think is going down, as long as I sell another Call, thinking it will go down a greater amount.

10) Fact: That's what exchanges are all about. The Options Clearing Corporation is considered to be the contra side of every trade and insures that every trade obligation will be met. Is it possible that something horrific could happen and the OCC couldn't meet its obligations? Highly unlikely, due to margin requirements and other safeguards, but theoretically possible. However, if that were the case, the financial state of the economy would be in such upheaval, that we would all have a lot more to worry about than our options trades.

11) Fiction: Despite what you might see on the late night cable channels, all positions must be monitored to some degree. The unexpected happens a lot more commonly than anticipated, and by keeping an eye on your positions, you'll be able to take defensive actions and minimize losses in those cases.

Okay, we're done. So how did you do? Based on the number of questions answered correctly, here's my totally unscientific analysis of your results:

11 a perfect score, I'm impressed, you should be writing the articles!
9-10 you're probably making money with your options trading
6-8 continue to read my articles, you're getting there
3-5 continue to read my articles, and the archives, and some options books, and....
0-2 Did you know that the Brooklyn Bridge is for sale?