Somebody asked me recently why I like trading options so much.
I've been asked that question many times. And my typical answer has me listing all of the advantages that options provide over stocks.
But this time, for whatever reason, my answer was a bit different. I immediately blurted out: "when I look back on my trading career, my best trades have been in options."
As soon as I said that, I remember smiling, as all of my spectacular winners over the years flashed through my mind.
It was true. And my smile only got bigger as we talked.
My Introduction to Options
The very first trade I ever made was in the commodity futures market. It's funny when I look back on it because futures are even less understood than options. But that was my starting point. (My path in life has always been a bit unconventional.)
The trade was in sugar (World Sugar #11 to be exact). The trade went ok. But nothing too memorable other than it was my first.
I soon discovered that as a trader, I wasn't much of a risk taker. And the highly leveraged futures contracts were probably the riskiest investment one could make. So I set out on a way to better manage my risk. And that's what led me to limited risk options. I liked the sound of that 'limited risk' part. And that's when my love affair with options began.
I had a knack for finding winning opportunities. I soon found myself trading grains during the drought, trading oil during the first Gulf War, and catching the coffee market during two freak frosts in Brazil. And I took advantage of them all through options.
But these special situations called for special strategies. I employed straight long calls for some, but used bull call spreads for others, and at times, a seldom used technique called 'ratio back spreads' for the most unique opportunities. Profit, of course, was my motive, but risk management was always foremost in my mind.
Larger World Out There
With over 10,000 stocks out there vs. only the handful of commodities I was interested in, I decided to expand into equities.
I incorporated both stocks and stock options into my trading. And now I trade those exclusively.
When I joined Zacks in 2000, I was fascinated by the Zacks Rank. It was the most profitable and logical stock rating system I had ever seen. And the track record of performance was testament to that.
Over the years, I studied and used the Zacks Rank profusely, and became an expert on it.
And now, I couldn't imagine trading without it.
Eye on Risk
Risk management continues to be one of the most important factors in my trading. Especially now, as I get older.
I've seen people blow themselves up in both stocks and options. Usually, it's due to bad habits that go unchecked, leading to silly risks and dire consequences.
Ironically, these bad habits are usually created during the most bullish of markets, where even bad choices and mistakes can be rewarded.
But when the easy-money stops, their accounts soon become a shell of their former self, as each poor decision takes its toll in losses.
With proper position sizing and the right option strategies, you can enjoy big gains with only a fraction of the money needed for stocks, and a fraction of the risk.
Zacks Rank and Options
Even though we've been in a historic bull market where almost everything has been going up, it's been quite different this year where there have been distinct winners and losers. And it's a reminder that stocks can, and do, go down. In fact, more often than not, stocks go sideways, trading within defined ranges without any meaningful move in one direction or the other.
The Zacks Rank is ideal for spotting the future winners and losers with its Zacks Rank #1s and #2s, Strong Buys and Buys, and Zacks Rank #4s and #5s, Sells and Strong Sells, not to mention the Zacks Rank #3s, Holds (which is another way of saying there's no compelling reason for the stock to outperform or underperform the market).
But most stock investors only buy stocks, making money if it goes up. Investors can sell (short) stocks and make money when a stock falls, but few do. (I suppose the idea of 'unlimited' risk is likely what keeps them away from that.) But there's absolutely no way to make money in stocks if it goes sideways.
With options, however, you can make money if the market goes up, down, or sideways. And to a certain degree, you can even make money when you are wrong about the direction of a stock. All with limited risk.
In addition to the strategies I mentioned earlier (calls and puts, bull and bear spreads, and ratio back spreads), I also now include iron condors, butterflies, calendar spreads, and more. All are ways to make money no matter what direction (or non-direction) the market is going in.
The Option is Yours
Investing in stock options is really just an extension of stocks. (They're not called stock options for nothing.)
And the word 'options' is another way of saying choice and flexibility.
If options are new to you, there's no need stop what you're doing now and make a total switch to something new. Start off slow. That's what I did.
Sometimes the best way to invest in a stock is through the actual stock itself. I have stocks that I've been in for years. And some that I've just gotten into.
But, other times, options are the best way to go. And when it is, take advantage of it. Feel what it feels like to have a few option positions on. See how you like the different strategies to make money in various directions. Enjoy the ability of doing so with significantly fewer dollars at risk than with stocks.
You may find yourself loving options like I do, and make it a part of your everyday investing. Plus, you'll no longer have to feel dependent on a bull market to secure your financial future.
The road less traveled can be an interesting one. And a profitable one.
Want to apply this winning option strategy and others to your trading? Then be sure to check out our Zacks Options Trader service.
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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.