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The Three Legged Stool of Options Trading

There's No Escape

Traders always want a quick fix. A way to get rich quick without a ton of effort. The "perfect trade" where they come into it in size and ride it to perfection.

A dose of trading reality tends to make us grounded or put us into the ground.

Options Don't Help

Many learning that the edge they have to grind out in stock trading often look towards the option market to find that sweet spot of outsized gains for little risk. In other words, they become option buyers.

And then they learn the "wonders" of theta and how a leveraged position can become less leveraged due to charm.

Risk, Reward, and Odds will always be linked.

So they flip the coin and start looking at option selling. The gains may not be outsized, but hey they're nearly guaranteed. All you do is sell a .20 delta put every month and make 30% annualized returns, right? And if you sell an option and it expires worthless, you've got a 100% gain, right?

It'll work for a few months. And that one time they're wrong it will wipe out all their gains, and then some.

It's About Balance

There is one inescapable truth about the options market: you will never remove the relationship between risk, reward and odds.

In other words, there's no sure thing in the market. There's no perfect system that if you trade it blindly month over month will guarantee profits. Yes, you actually have to develop trading skills and analysis when it comes to the underlying stock and the implied volatility.

How To Profit

So where does our edge lie in the market? Well, let's go back and look at our 3 components: risk, reward, and odds. The risk is not actual risk, but it is implied risk. It's what the options are pricing in, and it drives the potential rewards and the implied odds.

So if the risk is overvalued or undervalued, you make the trade.

That's where your edge lies.

 

by Steven Place

Steven Place is the founder and head trader at investingwithoptions.com/