By: Steve Smith
It was a long time ago. I was working for my father’s firm running trades for the brokers. I had saved my money from college and working. I decided that it was time to put on a trade for myself. I searched the financial press, studied charts, and researched everywhere until I found a “sure thing!” I was going to knock this one to the moon.
United Airlines (UAL) was merging with Northwestern. There was no way the stock would go down…
The merger was very bullish for UAL. So, I sold 150 Put options for $1. Ten contracts, so I collected $1000. The 150 puts were so far out of the money, and I figured there was no way the stock could ever go that low.
Two days before the Puts expired the merger was canceled and UAL tanked. By the time I was out of the trade, I had lost $50,000! That was painful for a just an out-of-college kid back in the ’80s. I licked my wounds and started over…. And I learned a valuable lesson.
You ALWAYS want a limited and well-defined downside.
And it’s easy to get if you structure the trade correctly. Had I used a spread instead of selling naked puts. I wouldn’t have collected quite as much premium, but I would have been able to limit my downside – so I didn’t lose my entire nest egg at that time in my life. One of my favorite trades is a strategy I call the Main Street Derivative. It lets retail investors mimic a strategy used by some of the richest investors on Wall Street to add to their gains and reduce their downside.
The cool thing about the strategy is that you don’t need a lot of money to use it and you have a well defined and limited downside. That’s why it works so well for Main Street investors. If you want to make Wall Street money with a Main Street account, go check it out.
To Your Success,
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.