“A guy told me one time: Don’t let yourself get attached to anything you are not willing to walk out on in 30 seconds flat if you feel the heat around the corner.” ~ Neil McCauley (actor Robert DiNero), in the movie Heat.
That’s how a trader’s market feels like…with so much volatility in the air…you have to be willing to admit when you’re wrong and be able to adjust quickly.
The buy…buy…buy days are gone. It’s time to get strategic if you want 2019 to be your most profitable year.
That said, what if I told that right now you have the tools to make money in any market condition – up, down, or sideways…
That you aren’t limited to a long-only strategy… and you can achieve greater profits with less risk…
Sounds like a gimmick right?
It’s not.
In fact, If I didn’t run a service and have all eyes on me, I doubt you’d believe the type of returns I’ve been able to yank out in this ugly and confusing market…
The Case for Options
You’re probably wondering, “How are you able to multiply your money in such a short amount of time?”
Well, I’m able to take advantage of small inefficiencies in the options market. That said, the benefits of options are worth listing.
Here are just a few of them:
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You can reduce your risk with options.
You see, if you’re long stock, you can reduce your risk by purchasing put options to hedge against your downside. Now, if you don’t know what hedging with options is all about, check it out here.
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Options provide leverage.
Options are typically cheaper to purchase than shares of stock. That said, traders are able to control larger positions in options than stock.
For example, let’s assume you think Apple Inc. (AAPL) is a good buy right now. It’s currently trading around $150…well, to buy 100 shares, you would need $15K.
But what about the options?
Well, if you think AAPL could rise above $160 within three months, those options are around $7.40.
Since options have a multiplier of 100, those options would cost $740, a lot less than $15K to control 100 shares of AAPL.
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Options are non-linear.
It’s simple, Jensen’s inequality tells us options have non-linear payoffs.
Don’t worry, we’re not going to throw Greek letters and math formulas at you…
Take a look at this profit and loss (PnL) diagram of a long stock position in the SPDR S&P 500 ETF (SPY):
Notice how this is just a straight line – we call this a linear PnL chart. If you bought 100 shares of SPY at $240.40, you would make $100 if SPY goes up $1, and so on. On the other hand, if SPY goes down $1, you would lose $100, and so on.
However, here’s an options position on SPY:
Look at the difference between the two positions. Both control 100 shares of SPY, but the options position has a non-linear payoff. You see, your downside is capped to the amount you paid for the option ($489 here)…keep in mind, those options expire in 2 months.
If SPY moves a few percents higher, you could more than double your money with the options position…but with the stock position, you won’t see abnormally high percentage returns like these:
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Options allow you to be creative and make money in any market environment.
When you’re trading stocks you have two options – long or short. However, with options, you can do so much more. Not only can you bet on stocks rising or falling, but you can also make volatility bets. For example, you can set up trades that can make money if you think it’s going to be volatile or not, as well as, place trades on specific price levels you think a stock can go to or not.
For example, if you’re expecting the market to be volatile for the next month and a half, you can buy a call and a put with the same strike price and expiration date.
Here’s how the risk profile of that trade would look like:
You see, if SPY moves a lot in either direction, you would make money…but if you were in shares of the ETF, you would only profit if it goes your way.
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When traded correctly, options can help you sleep better at night.
Ever go long a stock and can’t sleep at night? A lot of traders have this problem because you simply don’t really know whether it can gap down multiple percents due to corporate or market catalysts.
However, when you’re buying options, or hedging with options, you know your maximum loss…so you can step away from your desk and not stare at your positions all day.
When stocks and commodities have dramatic price swings, the trading community looks around and asks if there are any casualties. It’s usually the over-leveraged traders who are the ones who don’t make it. A firm in Florida recently got wiped out because of “a bet” gone wrong, trading natural gas options. When investors hear about stories like this they get scared off.
Growing up in Texas, I’ve seen my fair share of cowboys. However, as father and husband, my gun slinging days are over. If the risk vs. reward doesn’t add up, then you won’t see me in the trade.
Lastly, with the government in shutdown mode, I expect this volatility to stay. An environment that makes it difficult to keep positions on for too long. However, an environment that is ideal for the strategic options trader. If you’re ready to get started – let’s go!