This year in the stock market has been all about The Great Rally of 2013. It’s been seemingly unstoppable with no meaningful corrections or downturns along the way. What this did to option premiums was crush them like a bug. That is normal in trending markets and especially so in rising markets as a relative lack of fear leads to underinsurance. The CBOE Volatility Index (VIX) has been in the low teens most of the year, for instance (that this is a warning sign for 2014 is grist for another column).
In this, my last column of the year, I would like to review some of what I’ve written here regarding options trading education and distill it all into a few helpful tips.
- Buying or selling options outright is not cost effective. Options are best traded in a spread or as a hedge against an underlying value.
- Options are not a good vehicle for day trading. Leaving aside that 90% of retail day traders lose money, options positions take time to mature. That could be days, weeks or even months.
- Use time, also known as calendar spreads, to trade a “first this, then that”, scenario. Think the market will be stable and take off in the spring? Sell near term calls, buy farther out term calls.
- When done properly, a Butterfly is an excellent risk/reward directional trade.
- Remember that a covered write is in no way different from being naked short the put.
- Just as puts can hedge against a down move, calls can be used to hedge against a move higher.
- Keep a Trading Log. Write down not just the price and time of every entry and exit, but also make note of your reasons for doing so. Even down to what you were thinking/feeling at the time.
- Remember that being short straddles and strangles can make you money for 10 straight expirations and blow you out on the 11th.
- A long VIX call spread is an excellent portfolio hedge against a market collapse.
- When there’s nothing to do, do nothing. Never trade out of boredom.
- The at the money straddle, in its wisdom of market supply and demand, says where the market thinks the trading range will be.
- Finally, and most importantly, to be successful in trading options it is absolutely vital that you consider all three dimensions, not just direction. Direction is the What. You also must consider the When (timing) as well as the Velocity (how fast/slow does the move happen.
My complete log of options trading education on See It Market can be found under my author profile.
Well, that’s that for this year. Look for more options trading education in 2014. It has been my great pleasure and privilege to write for such a fine site as this one. For me, my professional year is effectively over and I will spend the next couple weeks enjoying my friends and family. It may seem like Heresy, but there are things that are far more important than markets and money.
Happy Holidays and may you all have a happy and healthy 2014!!
No positions in any of the mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.