How Options Give You Options

Ted Francisco on Sep 30, 2020

By OTA Instructor Steve Suminski

They say that “variety is the spice of life”.  For options traders, variety is also the spice of trading. 

I started out as a long stock only trader in the early nineties, making trades on my Prodigy dial up service.  Since I worked for a tech company, that worked out really well until (guess when?), it didn’t!  Yep, when the dot com bubble burst in the year 2000.  This devastating collapse was THE singular event that motivated me to learn how to trade options in 2001.  Pain can be a great motivator!  Buying long stock alone now seemed one dimensional for me, and what I wanted was a Swiss Army knife for every situation.

This took time, of course.  I only traded Covered Calls my first two years of options trading and eased my way into it.  I added one strategy after another over time.  Is my learning now complete?  No way!  The learning never stops because the new situations and opportunities that come along never stop. 

Here is a summary of important ways you could use options to bring diversity to your trading:

  1. Diversifying through Time.  You can cover the gamut of time horizons with options from Day-Trading to Strategic Investing with Covered Calls.  Admittedly, Day Trading is not the easiest thing to do with options because there are some moving parts beyond price action to manage.  But it CAN be done, along with strategies that typically last a number of days, weeks, months, or years.  Macro trades, for example, use zones with weekly or monthly time frames that do NOT require frequent management.
  2. Diversifying your Delta Bias.  Delta is simply a measure of how bullish or how bearish you are.  Being able to generate returns in a devastating bear market is a HUGE game changer because bear markets often move bigger and faster than bull markets.  But that’s not all!  Some people refer to the ability to “sculpt” a trade with options strategies in order to dial up or dial down the amount of bullish or bearish sentiment you want, including no bias at all.  Life and markets are often not black or white, but rather shades of gray.  Delta sculpting allows for refining your approach to a variety of market conditions.
  3. Diversifying your Purpose.  What’s the purpose of trading?  The start of every good trading plan should begin with the simple question of “what problem am I trying to solve”?  Do you want to evolve strategies for  long term investments?  Or for the short-term?  Do you simply want to learn about strategies that have potential to help protect your portfolio from a Black Swan disaster that could wipe you out?  Are you looking to try to build a down payment for a house three years from now?  Maybe you’d like to try doing a combination of the above?  Within your Options portfolio, you can designate specific strategies and trades for specific purposes, and possibly even put them into different categories  of focus to help you keep them straight.
  4. Diversifying your Underlying Instruments.   Because Options can be traded on most any kind of underlying instrument (Equities, ETF’s, Forex, Futures, etc.), they offer a tremendous ability to have any kind of purpose for almost  any kind of sector, industry group, index, currency, or commodity. Options can provide so many choices and possibilities on how to trade them! 
  5. Diversifying to Accommodate YOU.  This just in.  Everybody’s different.  We have different commitments, health situations, ages, abilities, likes/dislikes, time availabilities, levels of motivation, time zones, knowledge, family situations, jobs, and resources.   Some of us can trade without time limitations, and some of us would be lucky to trade weekly or even monthly for an hour or two at a time, and everything in between.  Whatever your situation, there is probably an options-based approach that could be tailored to your current (and future) life circumstances. 

In the end, trading is a potential vehicle for us to work towards our financial goals.  I’ve been told more than once by some retirees that they enjoy the intellectual challenge more than anything, for example.  For the educated and informed investor, “Options give you Options, that’s why they call them Options”. 

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Options involve high risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options http://www.cboe.com/Resources/Intro.aspx (ODD). Copies of the ODD are available from your broker, by calling 1-888-OPTIONS, or from the Options Clearing Corporation, One North Wacker Drive, Suite 500, Chicago, Illinois 60666. The information in this article is provided solely for general education and information purposes and therefore should not be considered complete, precise or current. Many of the matters discussed are subject to detailed rules, regulations and statutory provisions which should be referred to for additional detail and are subject to changes that may not be reflected in the course information. No statement within the article should be construed as a recommendation to buy or sell a security or to provide investment advice.

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For educational purposes only. Trading is risky and you can lose money.