The Case for Options
If you were a logger and you were tasked with the job of cutting this redwood tree down and your choice of tools were the hatchet or the chainsaw, which would you choose to do your job? Let's say that you do not know how to use the chainsaw and you are afraid of personal injury with such a dangerous tool so you choose the hatchet instead. You know that you can get to your goal, only that it will take a lot longer time to get there.
Options are the financial chainsaw that can be very dangerous to your financial health if you do not know how to use them properly. On the other hand however, if you do know what you are doing with this financial chainsaw, you can get to your goal a lot quicker. Options allow us to get to our financial goals a lot quicker than the more traditional stocks and bonds of the past.
Options give us the ability to draw income from the market in an up, down, and even sideways market! By selling options, we can collect our profit so long as the market does not move past the break-even point of our position. This means we can make money if the market goes in our favor or against it, so long as it does not get past our break-even again.
Options give us the ability to have some room for error. I do not know where the market will be at the close of tomorrow and neither does any other rational or irrational person for that matter. If we were to take a directional play (long or short) with the future contract, we would invariably have a string of small loses with the occasional larger win. Now this is a positive expectation equation if we can make sure that the wins are large enough to cover all the losses.
Options give us leeway...for a price of course. I do not have to have any directional bias to make money with options.
An out-of-the-money option may have an 80 - 90% probability of expiring in the money and when implied volatility jumps up, this creates a good opportunity to bring some income in.
The price of a short option is unlimited risk of course so one must become comfortable with a certain amount of risk. And this does not mean that our position is locked into a binary decision point because we can always adjust our position when necessary. This would be the other 20 - 10% of the time.
By selling an overpriced option we get 3 immediate benefits. We profit from the mean-reverting implied volatility, we profit from the decrease in time to expiration, and we profit from the directional part if there is any. All of this works together to reduce the option premium which of course, as an option seller this is exactly what we are going after!
Options are the financial chainsaw that can be very dangerous to your financial health if you do not know how to use them properly. On the other hand however, if you do know what you are doing with this financial chainsaw, you can get to your goal a lot quicker. Options allow us to get to our financial goals a lot quicker than the more traditional stocks and bonds of the past.
Options give us the ability to draw income from the market in an up, down, and even sideways market! By selling options, we can collect our profit so long as the market does not move past the break-even point of our position. This means we can make money if the market goes in our favor or against it, so long as it does not get past our break-even again.
Options give us the ability to have some room for error. I do not know where the market will be at the close of tomorrow and neither does any other rational or irrational person for that matter. If we were to take a directional play (long or short) with the future contract, we would invariably have a string of small loses with the occasional larger win. Now this is a positive expectation equation if we can make sure that the wins are large enough to cover all the losses.
Options give us leeway...for a price of course. I do not have to have any directional bias to make money with options.
An out-of-the-money option may have an 80 - 90% probability of expiring in the money and when implied volatility jumps up, this creates a good opportunity to bring some income in.
The price of a short option is unlimited risk of course so one must become comfortable with a certain amount of risk. And this does not mean that our position is locked into a binary decision point because we can always adjust our position when necessary. This would be the other 20 - 10% of the time.
By selling an overpriced option we get 3 immediate benefits. We profit from the mean-reverting implied volatility, we profit from the decrease in time to expiration, and we profit from the directional part if there is any. All of this works together to reduce the option premium which of course, as an option seller this is exactly what we are going after!
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