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Option Trades For Income Demystified
This afternoon we will be talking about traditional ATM (At The Money) option trading strategies
. Is it true that they work? In my opinion, "they do work" but then in a long-term "they do not". What we are really talking about here is first of all, what are the income choices strategies? The most usual ones are: the Diagonal Spread, the Calendar Spread, Credit Spread, the Iron Condor, Covered Calls, and Butterfly Spreads.Steps to Success with Option Trades
All of the previously mentioned option strategies have two things in common. The first is that they all try to take advantage of time decay which means these strategies attempt to make money every single month from having a positive Theta position. In this article I won't go into the Option Greeks; just know 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 a Butterfly Spread, a Covered Call, the Iron Condor, the Calendar Spread, a Diagonal, eventually all of these strategies cause tremendous (insurmountable) losses to your trading account. And even when they work for two or three months in a row, they eventually have one really bad month that ruins all of the previous efforts and returns.
If somehow you have a way to avoid the stock market debacles, or if you happen to be very lucky, then you can find an outstanding success with these strategies. On the other hand, the average human being will never know when the market is going to trend in one direction for a few weeks straight, or when the market is going to gap.
One more serious problem with your ATM option strategies, typical income type, is that they tend to lose when the market becomes volatile. If the market starts to go up and down, then the option trader is forced to adjust their positions constantly. The trader is exposing his portfolio to tremendous (insurmountable) damage when the position is not adjusted. So, as the market goes up an down, and the responsible option trader makes adjustments, there is no way to make money. In mostly all cases, volatile months become losses.
These are the inherent problems with the popular, option income-strategies and are exactly why I no longer trade them. I tried for many years and had my share of success, but I found over time I wasn't getting anywhere. That's when I decided that I would be happier if my portfolio went either sideways or up. Now when I trade options, I do have some months where I might not make anything, but the important thing is that I've found a way to avoid loosing money too. I've found this style of option trading to be more successful over time than trading the traditional strategies.
I thank you for reading this article, and I hope I've given you some insight to why you may or may not be making money on the stock market with your option trading style. If you understand exactly what I am talking about, then you should really consider learning lower draw-down techniques that San Jose Options is teaching.
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