Why Options Trading?


Posted on Thursday, March 16, 2017 at 12:44 PM

I am often asked this question and truth be told, a whole book can be written to answer that question and literally hundreds have been including two by Dan Passarelli himself. In this blog, I am going to give a few of my thoughts in a couple of paragraphs. Just like many things in life, like working out, eating blue cheese or getting married, options trading is not for everyone. But if you trade in some capacity, it seems to make sense at least to me to consider options trading.

Probably the first thing that got me interested in options and I am sure many of you as well is the ability to resemble owning shares of stock at a greatly reduced rate. For example, with Apple Inc. (AAPL) trading at around $139 at the time of this writing, a trader or investor can buy 100 shares for $13,900 (100 X $139). Or an option trader could buy a Jan-2018 120 call with over 300 days till expiration for around 23.00 or $2,300 ($23 X 100) in real money. As more experienced options traders know, this is not a perfect tradeoff. Stock has no time decay like options (every day that passes options decrease in value due to time) and stock has a delta of 1 meaning for every penny the stock moves higher or lower, the position’s P&L will change by that amount.

Option delta for simplicity is for every dollar the underlying changes, the premium will increase or decrease by the amount of delta. For the AAPL example above, the current delta was around 0.76 so if the stock rose a dollar the position would only gain about $0.76 all things being held constant. The stock position would of course gain a $1 per share. But think of the tradeoff in price and what you could possibly do with the extra money if you purchased the option instead of the stock. In this case the difference is $11,600 (13,900 – 2,300). That is quite a few more potential option trades to consider!

The other aspect of option trading that jumps out at me is the potential to make money of the underlying is trading sideways. That is certainly not an option for stock traders since they can be either long or short the stock and if it trading sideways, there is not much chance to profit. Take a look at this 3-month daily chart below.

Essentially the stock was trading at around $54 three months ago, and three months later, it is still around $54. Now sure the owner of the stock would have collected a dividend, but he or she would have made zilch on the underling itself. Without going into great detail (to be discussed in future blogs), an option trader could have potentially collected premium with the stock trading sideways over the last several months. Out-of-the-money (OTM) vertical credit spreads could have been sold above and below the stock’s sideways range. So wrapping this section up, the ability to sell premium against an underlying or all on its own, gives an option trader an advantage in my opinion over other types of trading.

Certainly, we are just tipping the iceberg on the advantages and of course some disadvantages about options trading. But the ability to set up a strategy no matter what the market or underlying is doing, gives option traders a distinct advantage over other trading vehicles in my humble opinion!

John Kmiecik

Senior Options Instructor

Market Taker Mentoring Inc.

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