Trading Stock Options Speculatively

Psychology of the Trader

No doubt, there's a lot of truth to these biases, but biases they still are. Yes, foolish people with money can piss away the contents of their brokerage account in short order by trading stock options too aggressively. But the fact is, certain people are constitutionally very well-suited for aggressive option trading strategies.

An Unusual Example

My friend was totally gung-ho in everything he did, an ex-marine with the most aggressive sense of wonder I have ever encountered in another human being. His approach to one-on-one video game combat--we were shooting at each rather than at monstrous, alien enemies--was no different.

The game was open-ended. Every time a player's character was killed, it would regenerate randomly in some other part of the level. We probably played for thirty or forty-five minutes and my friend's technique was consistent and successful. He simply charged me all game long, hunting me down and then sprinting his character at mine as fast as he could, heavy weapons blazing, and then mauling me in vicious hand-to-hand combat if I were still alive when he reached me.

My own philosophy was more deliberate and cerebral. And largely ineffective in a tactical combat situation. Still, I recall with fondness the two or three occasions where I managed to hole myself in a shadowy corner or an elevated sniper's position, waited for him to run past, and then blasted the hell out of him when his back was turned, laughing in pure unadulterated joy as I listened to him cursing my cowardice.

So what does this have to do with trading stock options? I find that the preceeding is a more accurate portrayal of the successful options trader and speculator than more conventional images and definitions. Yes, the rookie options trader can make a lot of dumb, predictable, and frighteningly costly mistakes trading stock options. But just as there are professional gamblers who make real careers and incomes from playing games of supposed chance, trading stock options speculatively, for the right personality, is not only a viable choice, but the only choice.

As in the story above, the successful options speculator, by his very nature, will favor the tactical over the strategic. You can be drawn to both, of course, but for the speculator, in Jungian terms, it's the Warrior archetype he embodies, not the King archetype. Frequently, many warriors grow into kings, but this is always an issue of individual personality, not maturity. There are two types of kings--those who lead their troops into battle and those who send their troops into battle. Traders, I contend, lead their troops into battle.

The Profound Difference Between Debit and Credit Spreads

There is a profound difference between debit spreads and credit spreads. Don't get me wrong. I'm not saying that any option trading strategy that takes away from your cash balance is inherently more risky or speculative than a strategy that adds to your cash balance. But there are revealing differences and assumptions between the trades that I think are important to explore.

• Debit Spreads--shelling out net cash on a single or multiple leg options strategy--is not about owning something but controlling it. The debit trader recognizes the temporary uses of a tool and is under no illusions of permanence. And there is something (Freudian, dare I say?) about investing your resources and energy in something small and then waiting for it, rooting for it, to get super big, super fast. The bigger, the better. Size is measured not in inches, but in tens of percent ROI.

• Credit Spreads--collecting net cash on a single or multiple leg options strategy--is about another set of dynamics altogether. At some level, credit trades are always about cash flow. And cash flow is primarily about the impulse to harness and domesticate. It's ultimately motivated by the desire for cities and empires and the quest for permanence.

The more I've pondered these distinctions, the more they've made sense to me. Dividing option trading strategies into net debit trades (gambling/speculation) and net credit spreads (income) is not a typical method of most option education resources, but I really think that it's vital to recognize the structural differences and implications of these two broad categories. There's nothing magical in the individual option trading strategies themselves, of course, but there is great power when you align your trading and investing strategies with your core individual self.

Characteristics of the Trade

• Technical Analysis emphasized over Fundamental Analysis

• Short Term emphasized over Long Term

• The Aggressive emphasized over the Conservative

• Biggest Attraction: The small, but very real possibility of making a killing

• Pragmatic Philosophy: lots of small losers and a few big winners (crucial credo: "Cut your losers short and let you winners run.")

The Gambling and Speculation Strategies