How have I had great returns in my trading account while never owning a single share of my biggest winning stocks? I also never shorted the stock of my biggest winning short plays. I also controlled hundreds and at times thousands of shares of stock for minimal capital and caught the majority of many moves while managing risk.
How did I do this? With primarily liquid front month in-the-money weekly options.
Stock options truly give you more options in your trading. While stock trading is like checkers, options more resemble three dimensional chess.
With options you can:
- Control large blocks of stock both long and short with small amounts of capital.
- Manage your risk with predefined maximum capital at risk.
- Both buy or sell time value.
- Both buy and sell volatility.
- Bet on a stronger trend than the market is pricing in, but bet on both directions at the same time. (straddles and strangles)
- Create synthetic stock positions using options with little capital out lay. (Selling a put and buying a call option at the same strike price of the underlying or the reverse)
- Hedge your risk. (Buying puts to insure long term positions that you do not want to sell.)
Risks:
Options also have risks if used incorrectly:
- Lack of liquidity. Watch Bid/Ask spreads carefully do not trade options that are 10% apart, you will lose 20% of your capital at risk both entering and exiting the trade. Only trade high volume options with tight spreads, examples Google, SPY, Apple, Priceline, FB, NFLX, Fas, and Faz and many others have tight bid ask spreads.
- Expiration. If you bet on a strike price that the stock does not make it to by expiration you could lose your entire bet and end up at zero. Also understand your planned hold time.
- Options are a bet- not an asset. They are only worth the intrinsic value of the underlying at the time of expiration nothing else. They are contracts between you and the person on the other side of the trade when buying or selling, options are not equity in a company or a bond.
If you are interested in learning the right way to use options for profits in the stock market then my book Show me Your Options is a great place to start.