Options for Your Options Trading
Welcome to the Tuesday Rude!
Beau Jon is more than just a Rude reader. He’s my pen pal.
We got into a chat about options trading that I’m going to expand on in this piece. It may or may not be relevant to you and your investing style.
Ben Settle, of email marketing renown, recommends everyone read Jim Camp’s books on negotiating. I couldn’t agree more.
One of Camp’s mantras is to give the other side the right to veto. That is, welcome the face they may simply say “No.” Camp looked at rejection as a signpost and as the beginning of a negotiation, not the end of one.
In this case, I give you the right to veto this entire article. If you’re one of my good banking friends who’s already worth 7-9 figures – you know who you are – this article is especially not relevant to you.
This article is meant as a hint to those who may have wanted to ask about options but didn’t think to do so. Nothing more.
You must understand what I’m about to write, and here it is:
I hate trading. Yes, you read that right. I. Hate. Trading.
Sitting down in front of a screen, trying to make heads or tails of market moves… it’s just not me. It’s one of the primary reasons I left banking.
On an intraday basis, there’s just too much noise for me to make any sense of it. Combine that with the fact I live in Asia and would have to do said analysis during my sleeping hours. It’s just a big roadblock for me.
But talking and writing about big moves, hot sectors, and significant themes over time? Love it. I love this job. It’s precisely what I’ve always wanted to do.
Now that I’ve got that out of the way, here goes:
The Answers to Questions You May Have Not Thought to Ask
Is it ok to start options trading with $5,000 in my account?
Yes… but with a bunch of caveats.
Likely, you will not make very much in the way of profit. There’s also a fair chance you may lose enough of the $5,000 to give up.
The rich get richer because you don’t need much of a percentage return to boost your overall wealth.
For example, if you earn 25% on $5,000, that will bring your account to $6,250.
That’s great, but not lifestyle-altering.
If you have $5,000,000 and earn 25%, you will have earned $1,250,000, bringing your account to $6,250,000. That’s not lifestyle-altering for a rich man, either, perhaps.
But that $1,250,000 would change your life.
You will change as you break on through to the upside of wealth. But it will take ages if you start with $5,000.
Are you still of the opinion that smaller accounts should only buy options?
Yes – and now more than ever.
Since I can’t watch the monitors all night, the last thing I want to think about while I’m counting sheep is, “Did my short option position put me in the poorhouse overnight?”
Remember, Nick Leeson of Barings Bank infamy blew up his trading book before 6 am, thanks to the Kobe earthquake. There simply was no way he could exit his position.
You may say the same thing about long positions, but remember that you can only lose the premium you paid on long positions.
With short positions, you can lose the premium you took when you sold the option, and you can lose a lot more. Short positions are contingent liabilities. “Contingent” means “you may have to,” and liability means “pay later.”
Where can I learn more about options?
I like Felix Frey at OptionGeek. His CV checks out. He doesn’t sell options.
And Felix has worked for the big guys on Wall Street who service the hedge funds that routinely clean up trading long-only positions.
This is important: we’re not affiliates for him. (That is, we do not in any way profit from recommending you take a look at his stuff.)
I also hasten to add that I bought his package when he first started. It’s much, much more expensive now than he was then.
My advice is to watch all his free videos, both on his site and on YouTube. Then make a judgment call.
If I choose another service, what are the red flags?
I wouldn’t learn from someone who advocates:
- Selling naked options.
- Buying only spreads.
- Making excessively “leggy” trades, like iron condors and butterflies.
I’ve already covered selling naked options.
Buying debit spreads are fine. Nothing wrong with them. Except that you cap your upside. And when you’ve got a smaller account, I think it’s the last thing you want to do.
Iron condors and butterflies are ok, too. But not when you start and not when you’re trying to make upsized profits. You just don’t earn a significant enough return to justify the trade.
You want to look for 2-3x profits rather than a % profit if you’re trading options.
As a bonus, I’d also stay away from people who only support trading ITM options for profit.
Felix likes the slightly OTM stuff to grow profits faster. I agree with him. But…
You need to learn how the markets and single stocks trend.
Aye, there’s the rub, as Hamlet would say.
Options are only a vehicle that allows you to express your view. Yes, they are a decaying asset that increases your urgency. And yes, they grant you leverage.
But the thing that makes options work for you is if the trade would work as a stock trade.
That is if you bought the underlying stock, would you make a profit? If so, it’s a candidate for an options trade.
If not, it’s just a lousy trade no matter how you put it on.
So it’s important to know that options are not a magic pill that will make you money no matter what. They’re likely to take money from you if you haven’t done your homework.
To Wrap It Up
That’s my 16 cents.
Agree or not, I’d love to hear from you. Write me at firstname.lastname@example.org. Tell me what you think. Let me know how you’re going if you’ve started your journey.
All the best,