Is Options Trading Brain Surgery?
Every time you read something I write, always have at least a little skepticism. Investors may only tell you about their investment wins and try to overlook their own losses. Before I begin this new series, you have every right to know if I am qualified to write about options trading. I want to give you two comparisons to help you understand my skill set. One has to do with brain surgery and the other with cooking and baking.
The only real way to know if a doctor is a good physician is if her patients not only survive but thrive. Of course, if she is a brain surgeon, the stakes are higher than if she is a family medicine physician. I’m not saying the family physician is less skilled, compassionate, or valuable. However, entering the brain is not the domain for most doctors or even surgeons. I am not a brain surgeon options trader. I’m more of a general practitioner – a GP of options. So the things I hope to teach you are not out of reach. You don’t have to be a brain surgeon to trade options.
Just like a GP is a physician whose practice is not oriented to a specific specialty, but instead covers a variety of medical problems in patients of all ages, I am a GP options trader. I don’t do every kind of options trade. I avoid the brain surgery options trading and stick to less complicated general practice options trading. I have a plan for how I will give you what I believe can get you started.
Cooking Requires Ingredients and Instructions
Because I know my way around the kitchen, I can make the Thanksgiving turkey, bake a really good gluten free dark chocolate chip banana bread, or make some really tasty BBQ pork ribs. When I do these things, I have a recipe, I know the ingredients, the steps to perform, and how long each item needs to be in the oven. In the same way, I have discovered that options trading is very similar to baking a good loaf of banana bread. You have to start with the right quality ingredients, focus on the repeatable instructions, and then “cook” the option by submitting a trade.
Defining What Options Are
In my next post I will dive deeper into the description of a stock option. At this point, the simple explanation is that an option is a contract. It is an agreement with another nameless, faceless trader who wants to buy something from you or sell something to you. Just like other areas of life, there is more demand for some contracts than others. For example, most people eat eggs, so the demand for eggs is high. However, the demand for molasses is low, so Aldi doesn’t stock it at the present time. They want to have a good flow of product through their stores, so they sell what moves. So I will focus on contracts that move. The more supply and demand, the more likely you will have a successful contract negotiation.
Does my Recipe Work in a Bull Market?
The best way to know whether my banana bread is good or bad is to taste it. The best way to know if my options trading process is “good” is to know if I made money doing it. In 2021 I started small in January and only made about $2,000 in the entire month. As I experimented and refined my process and the ingredients I was using, I significantly increased my profits during the last half of 2021. In fact, November and December were evidence that I had a set of ingredients and a set of instructions that worked. Total options income was over $90,000. However, a caution is necessary. 2021 was a bullish market. My options trading strategy works best when the bulls outnumber the bears. But even bears trade options.
Does my Recipe Work in a Bear Market?
2022 has been a more challenging year for options and stock traders. YTD the SPY S&P 500 index is down about 18%. The QQQM Invesco Nasdaq 100 ETF is down 31% YTD. So is ONEQ, the Fidelity Nasdaq Composite Index ETF. The DIA SPDR Dow Jones Industrial Average ETF is only down 9% YTD, but it is down. Is it possible to make money trading options in a bear market? It is, but it is far more challenging. When a month is bullish, the action is sweet. When things turn sour, the opportunities are harder to find. It is better to go slow than to get overly aggressive in trading options.
Nevertheless, total options income exceeded 2021’s results because of a strong first half. Dividend income is also projected to beat 2021, as expected. What I plan to do in this series is help you learn what works from my experience and experiments in options trading. I believe you can nearly double your dividend income by supplementing it with options trades if you invest in the right companies. For example, if you have $5,000 in dividend income, it is not unreasonable to think you might earn as much as $4,000 trading options in a bull market.
Links for Learning
I have found Investopedia to be a helpful place to learn some basics about various aspects of investing. Therefore, I plan to share at least one link in every post to help you with the basics. Bear in mind that Investopedia is not likely to tell you how to trade options. That is my job. But Investopedia is a good resource to learn some important concepts.
Today’s link is “What are Options?”
Don’t get mired in the details, but it is helpful to know that there are calls and puts. Don’t worry if you don’t understand them after reading the Investopedia post. I will talk about calls and puts in future posts in this series. INVESTOPEDIA
Know Your Flocks & Herds 