Option traders have many choices. They can use options to make a nice little income by relying on the status quo. Or they can use options differently, to make a lot of money occasionally when the status is not so quo, at the expense of long strings of small losses in between big wins.
After reading that paragraph some people would think, “Relying on the status quo? Nice little income? Meh. Might as well drive a minivan and live in the burbs. Give me the thrills and chills.” Others would think, “What? There can be losing trades? Really, no thanks. A nice little income is just what I need. My twenty years as a wireless phone customer service agent have given me enough stress to last a lifetime.”
If your take was either of these, or anywhere in between, there are option strategies that align with the way you think about the world. And using a strategy that harmonizes with your general outlook makes success far more likely.
Let’s say you are more of the minivan persuasion. You could use options to become a sort of part-time insurance agent, specializing in selling low-risk policies. As a writer of carefully chosen options, you would be selling insurance against events which have a very low probability of happening. The majority of trades would pay off a modest amount. Occasionally you would suffer a significant loss, although you can insure against any one trade turning into a catastrophic loss. Your goal would be to have the large number of modest wins more than compensate for less-frequent losses. This “boring-investing-is-beautiful” approach can pay off very nicely over time. People who might appreciate that tend to be analytical, disciplined and willing to apply themselves steadily. For those people whose mind is comfortable working this way, it can be a great way to go.
But an approach like this is not for everyone. Another type of person is someone who is not looking to pay the mortgage like clockwork. They may have a sufficient income from elsewhere, other investments and a small amount of risk capital that they want to try to get maximum mileage from. They might be willing to swing for the fences, knowing that many times they will strike out. The prospect of occasional big wins keeps them going, even through the dry spells.
This second person might look for situations that are the exact opposite of the status quo – companies about to report earnings, merger candidates, companies likely to benefit from world events and the like. Instead of selling insurance, they would look to take positions that will pay off in a big way if they are right, and lose in a small way when they are not right or not right enough. These folks are most happy as the buyers of options, not the writers. Nose to the grindstone all the time may not be their style, but they are willing to dig in to a fascinating opportunity and mine it. When done diligently and skillfully, with small risks per trade, this too can work out very well. Many of the people who find themselves more suited to this style are more entrepreneurial types; salespeople, actors, artists; and others who love a project and hate routine.
These are only a few of the types of people who can find their trading niche in options. Anyone who is willing to work hard at it, either steadily or in bursts, can find their most comfortable method. The key is to pick an options trading style that works the way your mind does.