Option Trading Strategies - OverviewThe best option trading strategies are the ones that most closely match your own personality. Your investment objectives and your short-term and intermediate-term market outlook are important, but they are secondary factors. They are, in fact, products of your personality. Here's my radical discovery: Align your strategies with your core nature and you can't help but be successful. That doesn't mean you'll never lose money, of course, but your profits WILL eclipse your losses. It was intentional that I chose the plural form, strategies. Falling in love with and utilizing just one option trading strategy is as reckless as simply picking one at random. Being well-rounded is essential--in life and in investing.
Or think of it another way. Great baseball pitchers have more than one great pitch. You can have the world's fastest and liveliest fastball, but if you don't have a good curveball or a good change-up or a good SOMETHING to keep the hitters honest, you won't have a very long career.
Option CategoriesThe good news is that in the world of options--and this website--there are a wide variety of option trading strategies from which to choose. After much consideration over the years, I've found it helpful to divide the strategies into four primary categories:Portfolio Protection (The Hedge Strategy) Gambling/Speculation Income Leveraged Investments (Or click here to access the Options Reference page and see a complete list of all option trading strategies detailed to date on this site.) You'll note that the strategies aren't divided according to your risk profile or market outlook. Just about any option trading strategy can be made to be more risky or less risky. And I have found that the Bullish-Bearish-Neutral approach to selecting option trades works only in theory. In actuality, market forecasting, especially in the short term, is an extremely difficult, if not impossible art. I mean seriously--if you could consistently and successfully tell the future, you'd be rich in no time, with or without options. In a nutshell, the Gambling/Speculation strategies are essentially debit spreads whereas the Income strategies are all credit spreads. Obviously, some traders use both debit and credit spreads, but I believe that, fundamentally, most traders are drawn more to one than the other. This may seem a simplification but it is not. There is a definite psychological difference between a debit and a credit. Again, the grouping of these option trading strategies is not about risk appetite but rather trading orientation.
Portfolio Protection/Hedge StrategiesThese are the approaches for when your portfolio has gotten big enough that preserving your capital is at least as important as continuing to grow it. Or maybe you just want to take certain steps to protect it during cyclical downturns. Or maybe you're concerned about a specific holding and would like to shore up its defenses in lieu of selling it (e.g. due to tax considerations). Options always give you options.Speculation/Gambling Strategies
The truly professional gambler does not play the lottery or Bingo. Neither does he take stupid risks. On the contrary, he is a tactical and sometimes intuitive manager of risk. He has a higher threshold for risk, pain, and financial-emotional trauma. He also has a greater chance at incredibly lucrative payoffs.
I greatly respect these type of traders; I just happen to be better suited for approaches that are more strategic than tactical. I also prefer methods whereby I can accumulate long term holdings at substantial discounts, and then squeeze more out of them once I've acquired them.
Income StrategiesThere are also some incredible income opportunities available through the use of options. These range from the very conservative to the outright risky. Again, it's not the level of risk that determines the category, but rather your underlying preferences: are you attracted to taking a stake in something and watching it grow real big, real fast, or do you instead prefer to collect income in smaller (but still substantial), more consistent chunks?Leveraged Investment StrategiesMy personal bias is for the option trading strategies I classify as Leveraged Investment. Leveraged investments are, above all else, investments. They are serious, well-considered, long term commitments, in effect business partnerships with publicly traded companies that you believe will either increase in value over time or will produce a significant and sustainable income stream.What I term Leveraged Investments are option trading strategies designed to give your well-considered equity investments an even greater edge as a synthetic version of successful value investing, the acquisition of valuable assets at substantial discounts. Sometimes you get the discount before you purchase the stock, sometimes you get the discount after you purchase it, and sometimes both. But the end result is the same--you pay less for your stock than do your counterparts, and you make it produce more for you once you own it. Value investing has never been so sexy.
Some Final ThoughtsFinally, I want to clarify that just because I've divided the option trading strategies included on this website into four categories, I'm not suggesting that there are only four personality types when it comes to trading and investing.On the contrary, the stock market is an incredibly complex mechanism because it reflects the incredibly complex collective behavior of its incredibly complex participants. But I would suggest that the specific option trading strategies that most appeal to you will tend to congregate in the same category. If you're new to options, explore the individual stock option strategies in greater detail and find the ones you're naturally drawn to. Give them a whirl. Paper trading options is always a great idea (my own great shortcoming was that I always did my paper trading using real money). If you're an experienced options trader/investor, consider your own preferences consciously. Is there a pattern? A correlation between favorite strategies and consistent profits? Or do you tend to rely on just one stock option trading strategy? Maybe now's a good time to add some additional pitches to your repertoire. Finally, if you're thinking about using a paid option trading service (I've used them myself) make sure you consider the three most crucial questions before signing up.
|
