Options Trading: How to Avoid Chasing Prices

Posted On June 1, 2018 11:54 am

With the market, or at least the Russell 2000 and Nasdaq Composite, back at all-time highs, investors are starting to get that old FOMO (Fear of Missing Out) feeling. But rather than chase prices higher, savvy investors should consider options trading as a way to stake a moderately bullish position, generate income, and establish a price level at which they’d be happy to buy the actual shares.

Kirk Spano has a good primer on how he prints money by selling puts.  Here is his take:

When you see something interesting on the menu that you think might taste great, do you ask a few questions and then try it, or, do you say, “Nahhh, I might like it and then I’d want more, so I better not try it.”

Options are like that new dish on the menu for a lot of people. Unfortunately, many never will try the dish. And, they’ll never get to experience what regular option traders have come to understand: Options, used properly, can reduce risk, generate income, and increase total returns.

Having talked to hundreds of people about options trading, I know the question that gets asked by almost everybody: “…but aren’t options risky?”

The answer is that options trading is only as risky as you want it to be, and in most cases, less risky than actually buying the underlying stocks. In fact, the reason options were invented was to manage risk.

Whether you are seeking to build growth positions while mitigating risk or a retiree who wants both income and growth, this simple strategy can be a core staple to your investment process.

Selling Cash-Secured Put Options

One of my favorite options trading strategies is a very simple trade that generates portfolio income and reduces equity risk. Namely, selling a cash-secured put.

I am going to work through several examples of trades that I have on right now to demonstrate why this simple strategy is so effective. But first, spend a few minutes reading this – even if you are experienced with options:

If you are a beginner, go back to that article early and often.

 Related: This is a Risky Part of the Business Cycle – Here’s How to Protect Your Portfolio. 

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About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.

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