Inspired by a grueling and in-depth conversation that took place in my chat room yesterday, I decided to introduce a discussion & possibly another educational series regarding all the strategies within the world of options.
Again folks, I started this website in part to offer a simpler approach to understanding options, understanding how to use them, & understanding how they work. I recently realized however, that if we were back in the early 1500′s during the era of Vasco de Gamma, Ponce de Leon & Columbus, half the world hasn’t even been discovered or discussed yet.
So what hemisphere am I talking about? I’m talking about writing options, or ‘shorting’ options. I’m talking about straddles, strangles & combinations. I’m talking about vertical call/put spreads, calendar spreads, & bear/bull spreads. The list, as you all know, goes on and on to include names of birds & various insects like butterflies & condors. Shit I could make up my own options strategies using names of well known reptiles like the Gila monster or the Kimodo dragon. At the end of the day though, each one of these particular strategies serves its own purpose and seeks to capitalize off of expected price movement in an underlying stock. So whether you think a stock is going to go up in value, go down in value, or stay the same; there’s an options strategy that you can use to profit from. Whether you think a stock is going to move a specific amount within a specific period in time, there’s an options strategy you can use to profit from. If you own a stock and you want to hedge or add extra income, there’s an options strategy you can use to profit from.
Now, here’s my thoughts on writing options folks and I almost guarantee we’re going to get into a heated argument/discussion over this statement: If you’re not a GOOD trader, you should write options. Yea that’s right I said it!
Alright now before y’all start sending me hate mail let me clarify the above statement. It takes a heightened level of intelligence to understand which option expiration/strike to sell & buy or to create the correct straddle/spread to play an earnings call, but it takes ten times more effort to become a REAL trader who perfects the art of timing. You take any great trader on the street there is one thing we are all good at, and I say WE ’cause I AM one of those good traders.
For a minute, let’s just talk playing options naked. Now, for you perverts I don’t mean sitting in front of your computer butt ass naked I mean buying or shorting ‘naked’ options. The ‘naked’ aspect refers to the fact that you have no hedge on the position. If you short any option, you’re essentially betting AGAINST the buyers of that same option. They say 80% of options expire worthless. This obviously begs the question, “why even buy the fuckin things?” A trader like myself, who reads tape and places bets where he believes a big breakout/breakdown is about to happen, will buy naked options all day because he can double, triple, quadruple his account in seconds. A trader like myself, who is motivated by BIG returns, would buy naked options all day because he has a goal of making $10 million in a short period of time. Hedge funds, wealthy investors & institutions don’t buy options like I do. To put this into perspective folks, let’s consider casino gambling. The house always wins right? They collect a rake at every table & base their business on simple odds, statistics & probabilities.
Large writers of call/put options are, in essence, doing the exact same thing.
Here’s the caveat, these players have a substantial amount of capital to play the game with & are capable of placing hundreds of these small percentage trades over and over and over. This eventually produces consistent & substantial returns over a longer period of time. They STAY in the game, while most traders lose their shirt betting the farm on an option that will most likely lose its value by expiration.
Let’s bring this back full circle to the demographic here at Sanglucci.com. This comes down to a question of how do you want to play this game. Ask any trader here who has taken my boot camp or who has come to me for advice I tell them all the same. You must understand the psychology behind your own actions & your own personality in this market to decide what kind of strategy you want to employ. Some people have realized they suck at trading/timing. Some people have accepted all the risks and are trying to turn substantial profits within a short amount of time. I’m obviously part of the latter group. The difference is, I have a system where I go about it versus others who have no clue how to get there.
In reality, choosing a strategy that fits your profile is akin to theories on life, parenting or religion. Nobody has a fuckin’ clue BECAUSE THERE IS NO RIGHT OR WRONG ANSWER. The traders who make it are the ones who’ve made a definitive decision on how they’re going to go about it. They stick with their conviction and they press on UNTIL it works.
Options writing strategies are advantageous for playing news events, earnings calls, and for choppy market environments. These strategies, if played correctly, will provide scenarios where a trader can operate under much less mental stress. The ability to cap your max loss, while unfortunately capping your max gain, is an extremely important concept to understand & process.
A trader who can do both of these strategies, buy & write, is unstoppable…
Welcome to the World of Options folks. With your help & your comments, I will start to delve into each one of these strategies and explain them in my own terms to help you learn more about this intricate & sometimes overwhelming landscape.
Part 2 will discuss the basics of margin requirements & various broker issues.