Some Thoughts About Options Trading

Last week was a crazy one in the market – four days of gains and then a big crash on Friday when the jobs report came out and said that there were no new jobs created last month, the worst showing in eleven months.  It was a tough week for our portfolios (we generally hate volatility) but our bearish portfolio racked up a 5.5%, the seventh week in a row when it made gains.  Over this period, this portfolio has picked up 58% in value while SPY has fallen by 8.8%.

This week I would like to share some of my thoughts about my favorite subject.  Guess what it is?

Some Thoughts About Options Trading   

I think the key to options trading success is the exact same key to stock trading success; the ability to pick stocks or ETFs that will perform exactly as you would like it to.

In stock trading, you make money only when you buy stocks that go up or short stocks that go down.

In options trading, you make money when you apply bullish options strategies on stocks that go up, bearish options strategies on stocks that go down, neutral options strategies on stocks that remain stagnant or volatile options strategies on stocks that stage quick and explosive breakouts.

You only lose money in options trading when you apply bullish options strategies on stocks that goes down, bearish options strategies on stocks that go up, neutral options strategies on stocks that breaks out and volatile options strategies on stocks that remain stagnant.

Even though the key to success in options trading is largely the same as the key to success in stock trading or any other forms of investment or trading, options trading does have a few tricks up its sleeves to help put the odds in your favor.

First of all is leverage and protection.  The ability to risk lesser capital for the same profit or a lot more profit with the same capital already puts the benefit of risk in your favor.
 
Second is the ability to make a profit in more than one direction!  Yes, since the key to success in options trading is the ability to “guess” the correct direction the underlying stock or index is going to take, won’t your chances of success be dramatically increased if you could profit in more than one direction?

For example, the 10K Strategy which we employ at Terry’s Tips (a strategy using calendar spreads at several different strike prices) makes a profit when the stock goes upwards, remains stagnant OR drops a little!  Yes, all 3 directions.  Won’t your chances of success be dramatically increased with a strategy like that?

The key to stock investing is to pick the right stock(s).  Almost no one, even the professionals can do that consistently.  That is why options trading increases the odds of success in your favor if you use a strategy that profits from more than one direction.  This is a huge advantage that you do not get when you invest in stock – it only exists in option trading.