The Power of Options
Stock options are financial contracts that give the owner the right, but not the obligation, to trade the underlying asset for a certain price by a certain date.
Many people reading this newsletter are just entering this exciting world of making money on the stock market. Many, as myself, started out investing in stocks. Upon determining that this is a very long-term endeavor, I wanted to make money now. So, instead of investing, I decided to trade. The problem with that was the heavy upfront capital required to trade many stocks to make just a little money. At that time, stocks I was interested in costed $40-70. Today, these same stocks cost hundreds — out of my pay scale. This poor boy would have to invest many thousands for too small a return. There had to be a better way.
I looked at futures, foreign exchange and likely crypto, had it been invented.
I discovered options. The points that impressed me were:
- 90+% of traders lost money on these, mostly because of their own doing, such as not understanding them or losing emotional control.
- They had “Greeks” attached to them, which are factors that affect the price of these contracts.
I realized that all I had to do was learn these instruments slightly better than most everyone else, and learn how to control my emotions. The first part, anyone can master; it’s really not that complicated. Learning to control emotions was harder, which I will address in next week’s newsletter.
The interesting thing with options contracts is how they are priced and what moves them. Once I figured out the relationship between the news, interest rates and other fundamental factors, I had a pretty good handle on how they would likely move that day.
Then, combining technical analysis just made the job easier. Trader behavior repeats itself. It becomes very predictable, especially on the stock SPDR S&P 500 (SPY), which follows the top 500 U.S. stocks. How cool is that? All I had to determine was the economic sentiment of the day and trade SPY. My journey not only had a reliable vehicle but a roadmap to take me there!
There were many bumps along the way, no question, but options have incredible power. They have immense leverage, so SPY did not have to move very much for me to make a reasonable gain. I could invest a very small amount of my money and earn a respectable profit. Every day. This became quite fun as well. I now had it all: making money in a fun way in the morning and the freedom to enjoy it in the afternoons. I was able “to do what I want, when I want,” which is my Trading Room partner, Jon Johnson’s, definition of market success. People would kill for a “job” like this.
Was it a flash in the pan, a short-term gig I discovered? Apparently not. As long as there is a stock market and SPY stock (scheduled to cease to exist January 22, 2118), I will have the ability to earn money under my own terms. The best part is that, if I can do it, YOU certainly can! You need not have experience on a trading floor or suffer through years of college to learn day trading SPY options. You only need to hook your wagon to ours and absorb everything we teach.
To be clear, options trading is not for everyone. We can teach you the mechanics and advise on how to master your emotions, but we need your 100% commitment. This is a marriage of sorts. You must forego all others, lest you try to combine strategies that will inevitably confuse you. We can teach you everything you need to know. My motto: “If you want what I have, you gotta do what I do!”
I invite you to join us this Sunday night at 8 p.m., ET, for our weekly Intro to Trading/Week in Review. It’s an entertaining free event where you should even learn a thing or two. Click here to register.
Skip the preamble and join our Trading Room, where it all happens with Jon and me, 9:20 to 10:30 a.m., ET, daily.
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Good trading!
Hugh
