Safer Ways To Trade Options
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This afternoon we will be talking about traditional ATM (At The Money) option trading strategies. Is it true that they work? In my opinion, "they do work" but then in a long-term "they do not". What we are really talking about here is first of all, what are the income choices strategies? The most usual ones are: the Diagonal Spread, the Calendar Spread, Credit Spread, the Iron Condor, Covered Calls, and Butterfly Spreads.
All of the previously mentioned option strategies have two things in common. The first is that they all try to take advantage of time decay which means these strategies attempt to make money every single month from having a positive Theta position. In this article I won't go into the Option Greeks; just know that Theta is a dollar amount that option traders collect each day that they are in this type of trade.
What all of these strategies also have in common is that they cannot withstand a large, one day move in the market or a 10% move in a few days, but then they day comes when they wipe out most of your trading account.
If you're an experienced option trader, you know what I'm talking about. For example, if you've learned to trade the Iron Condors, and you've been trading the strategy for several years, you know your long term success is dependant on a certain amount of chance. True success comes from your ability to be lucky enough to not be in the stock market when we have a large move. Anytime there is a significant, directional change in the stock market, this strategy will always give up many months worth of returns.
Just like a Butterfly Spread, a Covered Call, the Iron Condor, the Calendar Spread, a Diagonal, eventually all of these strategies cause tremendous (insurmountable) losses to your trading account. And even when they work for two or three months in a row, they eventually have one really bad month that ruins all of the previous efforts and returns.
If somehow you have a way to avoid the stock market debacles, or if you happen to be very lucky, then you can find an outstanding success with these strategies. On the other hand, the average human being will never know when the market is going to trend in one direction for a few weeks straight, or when the market is going to gap.
Another serious problem with the typical option strategies is that they tend to lose when the market becomes volatiles. If the market is going up and down, the trader is forced to adjust their positions constantly. If they don't, they expose their portfolio to catastrophic damage. As the market moves up and down, or whipsaws back and forth, the responsible trader makes adjustments, though there may not be a real way to make money. In nearly all cases, volatile months become losses.
These problems are built in with your popular ATM, options income-strategies. Every trader who has a number of years of experience knows exactly what I am talking about. This is one of the reasons why I do not trade traditional option strategies any longer. Even though I had a great success at times, I found that over time I was not getting anywhere. Therefore I decided that I would be happier if my portfolio when either up or sideways. And even though I have some months where I do not make anything when I trade options, the really important thing about my trading style is that I have found a way to avoid the tremendous losses. In my opinion, this method of option trading is more fruitful over time than trading traditional option strategies.
I thank you for reading this article, and I hope I've given you some insight to why you may or may not be making money on the stock market with your option trading style. If you understand exactly what I am talking about, then you should really consider learning lower draw-down techniques that San Jose Options is teaching.
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