Option Trades for Income Demystified
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Do traditional trading strategies actually work? In general, I have to say yes, they do work, but in the long run, not as well. To elaborate, first you have to know what the traditional, income, trading strategies are. The most common strategies are; the Iron Condor, Calendar Spreads, Butterfly Spreads, Credit Spreads, Covered Calls, and Diagonal Spreads. Steps to Success with Option Trades All those option strategies have two things in common. First, they are all trying to take advantage of time decay, meaning they attempt to make money every single month from having a positive Theta position. We won't go into detail on the Option Greeks in this article; just know that Theta is a dollar amount that option traders collect each day while participating in this sort of trade. Secondly, none of these strategies can withstand a large, one day move in the market or a ten percent move in a single week. For that matter, any significant move in one direction would leave these trades in ruin. That's the problem with all the income strategies; they work for a while, but later, end up wiping out most of your trading account. The ones that have been trading options for a number of years know what I am talking about. The Iron Condor for example, if you learn to trade it, and you have tried this for a few years, you know that long-term success depends upon a certain amount of luck. To find true success with this strategy, the only way is if you luckily are not in the stock market when we have a large move. When there is a significant, at any time, directional change in the stock market, this strategy will always give up many months 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 you prove to be incredibly lucky, or have found a way to somehow avoid the stock market movements, then you can find great success in these strategies. However, we normal traders will never be able to tell when the market is going to gap, or when the market is going to trend in one direction for multiple weeks in a row. One more serious problem with your ATM option strategies, typical income type, is that they tend to lose when the market becomes volatile. If the market starts to go up and down, then the option trader is forced to adjust their positions constantly. The trader is exposing his portfolio to tremendous (insurmountable) damage when the position is not adjusted. So, as the market goes up an down, and the responsible option trader makes adjustments, there is no way to make money. In mostly all cases, volatile months become losses. These are the inherent problems with the popular, option income-strategies and are exactly why I no longer trade them. I tried for many years and had my share of success, but I found over time I wasn't getting anywhere. That's when I decided that I would be happier if my portfolio went either sideways or up. Now when I trade options, I do have some months where I might not make anything, but the important thing is that I've found a way to avoid loosing money too. I've found this style of option trading to be more successful over time than trading the traditional 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.