Why Options?

April 4, 2018

I started trading stocks in 1998 during the great “internet bubble.” 4 years later, I got interested in trading futures, and 3 years after that I started trading options which I’ve been doing primarily ever since.

I’m often asked why I trade options these days? And it’s usually obvious the asker is thinking that I’ve discovered some “magic edge” that can only be achieved with options, and they are desperate to get in on the game too. My usually unsatisfying answer is:

There is no BEST PRODUCT or BEST STRATEGY. What’s best is what’s best FOR YOU. I like trading options because I’m able to effectively reduce my reliance on accurately picking direction — an endeavor in which I’ve proven to myself time and again that I have no special skills. Options allow me the ability to make a little bit of money even when I’m wrong, while giving me the possibility to leverage into situations where I happen to be right (often luckily) on the direction. I know my limitations, and options help me minimize their impacts on my P/L, and even occasionally give me the ability to turn some of my weaknesses into strengths!

To the untrained brain, it’s easy to get lost in all the lingo of options trading. All the crazy names of spreads, the greeks to monitor, volatility, multiple expirations, etc. It is no stretch to make options trading as complicated as you’d like to make it. But if you’re like me, you like to keep things simple. And at the end of the day, it all comes down to understanding the difference between a call and a put. Every spread, at it’s core, is just a combination of different calls and/or puts and their interplay between each’s return stream over a series of prices.

I am not a guru, nor will I ever play one on TV or the interwebs.

I am simply a Trader who likes to define his risks and have a reasonable expectation of what my profits could be regardless of what conditions the markets throw at me. If anything, I’m a common sense, no-nonsense Options Trader.

Here is what I’ve been doing with my own trading account lately:

My $SPY options position at the close of trading on April 4, 2018

The graph above shows how my SPY options position makes or loses money over a spectrum of prices. The dotted vertical line represents where SPY is trading now. The dotted horizontal line is the zero line for profitability — above it I’m making money, below it I’m losing. The purple line shows me how tomorrow’s P/L would look at various prices (the market is currently closed). The light blue line shows me what my P/L would be at various prices on April 28th (options expiration) if I held this position and made no changes from now until then. The thing that should stand out to you is that I really don’t care which way the market moves tomorrow. As long as it picks a market direction and moves there, I’ll have plenty of opportunities to profit. The other thing to note is that I’m periodically making adjustments to this position throughout the day as the market moves, effectively “scalping” the position to minimize the effects of time decay that will result from holding an inventory of long puts and calls. But that is probably a discussion for another day…

My point is this — I trade options because I’m able to do things like what I’m doing above. I’m terrible at picking market direction, so I try to avoid having to do so. By avoiding a weakness, I’ve created a strength. We should be so lucky to accomplish this in all parts of our lives.


Originally published on medium