Safer Ways To Trade Options
Today I want to talk about traditional option trading strategies. Do they really work? Well, I would have to say that "yes they do work" but long-term "no they don't". Let me explain what I'm talking about. First of all, what are the traditional, income, option trading strategies? The most common ones are: the Iron Condor, the Calendar Spread, Butterfly Spreads, Credit Spread, Diagonal Spread , and Covered Calls.
All the Option Strategies mentioned earlier have two things in common. They all try to take advantage of time decay; in other words these strategies try to make money every single month from having a positive Theta position. We won't go into the Option Greeks in this article; you have to keep in mind that Theta is a dollar amount that option traders collect each day that they are in this type of trade.
What all of these strategies also have in common is that they cannot withstand a large, one day move in the market or a 10% move in a few days, but then they day comes when they wipe out most of your trading account.
Those of you that have been trading options for a number of years know exactly what I am talking about. If you learn to trade the Iron Condor for example, and you've tried this strategy for several years, you now know that long-term success really depends upon a certain amount of luck. The only way to find true success with this strategy is if you luckily are not in the stock market when we have a large move. Any time there is a significant, directional change in the stock market, this strategy will always give up many months of returns.
Just like the Iron Condor, a Calendar, a Butterfly, a Diagonal, a Covered Call, all of these strategies eventually cause catastrophic losses to your trading account. So although they may work for two or three months in a row, they eventually have one really bad month that that ruins all of the previous efforts and returns.
If you prove to be incredibly lucky, or have found a way to somehow avoid the stock market movements, then you can find great success in these strategies. However, we normal traders will never be able to tell when the market is going to gap, or when the market is going to trend in one direction for multiple weeks in a row.
Another serious problem with the typical option strategies is that they tend to lose when the market becomes volatiles. If the market is going up and down, the trader is forced to adjust their positions constantly. If they don't, they expose their portfolio to catastrophic damage. As the market moves up and down, or whipsaws back and forth, the responsible trader makes adjustments, though there may not be a real way to make money. In nearly all cases, volatile months become losses.
These problems are built in with your popular ATM, options income-strategies. Every trader who has a number of years of experience knows exactly what I am talking about. This is one of the reasons why I do not trade traditional option strategies any longer. Even though I had a great success at times, I found that over time I was not getting anywhere. Therefore I decided that I would be happier if my portfolio when either up or sideways. And even though I have some months where I do not make anything when I trade options, the really important thing about my trading style is that I have found a way to avoid the tremendous losses. In my opinion, this method of option trading is more fruitful over time than trading traditional option strategies.
After reading this, I hope you take home some insight into why you may or may not be making money on the stock market. If you've experienced any other the problems I've touched on in this article, you should consider learning the lower draw-down techniques San Jose Options has to Offer.
Article Source: FxTradingStock.com
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Trade safer! Trade smarter with San Jose Options! Visit our Options Trading Course online today to learn how to Trade Options!
by: Johnny M Junior
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Word Count: 686
Date: Thu, 15 Jul 2010
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