Having been in the trading and investing business for more than 20 years now, I have seen arbitrage opportunities come and go, a real strong edge or two fade away, rules or regulations close a loop hole to some free money and so on. Like anything in life, strong and easy opportunities to profit financially typically don’t last because enough people find out and compete for that opportunity, and it’s that competition that eliminates the opportunity. Today, the biggest edge that offers real strong consistent opportunities is in Options trading, and that is the focus of this piece.
Let me clarify, there is fantastic opportunity in Options if you know what you’re doing but that’s just it, most people don’t and there is a reason. Most people go to the Options market for two reasons. Some choose Options because it’s a very cheap market to get involved in. Others choose the Options market because they think you don’t need to know where price is going (market timing) to make money. While the second point is heavily marketed in the industry and very attractive, it’s not true. What’s funny is some Options strategies are called “non-directional” strategies, suggesting that direction doesn’t matter which is completely false. Also, every options platform has pricing models which, in theory, are supposed to give you accurate odds of success and failure and projected payoffs. Again, this is almost meaningless information because it’s flawed logic, yet almost everyone makes decisions on this data. Lastly, there are the Greeks. Again, while the information is interesting and a little helpful, none of it should be part of your primary decision making process, yet for most it is.
So, you may be thinking at this point that I am completely crazy for making these claims, but here is why I am so confident that I am correct. What the vast majority of Options decisions are made of, what the pricing models don’t at all consider, what the Greeks don’t include and more, are the buy and sell orders in the market. Meaning, real supply and demand is something most options traders and all options tools don’t factor into the decision. Everyone wants the short cuts of automated pricing models and tools, and that’s fine by me. Let’s look at an Options trade I exited last week, a position I was in for at least a couple weeks in Crude Oil (USO ETF).
Notice the Supply level (retail prices). We know this is supply because price fell strong from that level and didn’t remain there very long. This tells me banks are selling USO in that level and that they didn’t fill all the sell orders they wanted to. If they did, price would not have declined from that level, but it did. Next, we have the demand level (wholesale prices) below. We know banks are buying here because price could not remain at that level and rallied away in strong fashion. The trade was to buy puts (the right to be short) at supply, which I did, and then sell those puts at demand for a profit, which I also did. Keep in mind that puts increase in value as price declines. All that was used to make the decision of where to buy and sell was pure supply and demand (the orders). All that was used to make the decision on time to expiration was pure supply and demand (the orders). Also, in case you’re wondering what the red boxes are for on the chart, I wanted to point out that while they may look the same as the supply level I shorted at, they are very different and would not be considered supply levels at all.
I have been involved with Options for more than 20 years and have seen this simple path to profits turn into an equally complicated money losing opportunity for most. Again, the reason is logical decision making has been taken over by faulty data driven decision making. As a trader, I love this because it offers me a huge edge. As an educator, it’s my responsibility to share this info and, of course, this is only my opinion. Had I used the Greeks or pricing models for this opportunity, that would have ensured I would not have taken this trade. The Greeks and pricing models would not have supported this decision and, in many ways, would have had me taking the opposite action. Following pure supply and demand, I am able to buy puts when they are cheapest and about to become expensive, same thing for calls.
So, if you’re an options trader trying to make this work with all the fancy tools and struggling, don’t beat yourself up, it’s not you. Conventional options trading theory is about as flawed a strategy as trying to eat your favorite soup with a fork. Focus instead on the simple logic and always keep in mind that how you make and lose money when buying and selling anything in life never changes.
Hope this was helpful, have a great day.
Sam Seiden – firstname.lastname@example.org