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Option Trades for Income Demystified
Today I want to talk about traditional option trading strategies. Do they really work? Well, I would have to say that “yes they do work” but long-term “no they don’t”. Let me explain what I’m talking about. First of all, what are the traditional, income, option trading strategies? The most common ones are: the Iron Condor, the Calendar Spread, Butterfly Spreads, Credit Spread, Diagonal Spread , and Covered Calls.
All those option strategies have two things in common. First, they are all trying to take advantage of time decay, meaning they attempt to make money every single month from having a positive Theta position. We won’t go into detail on the Option Greeks in this article; just know that Theta is a dollar amount that option traders collect each day while participating in this sort of trade.
Secondly, none of these strategies can withstand a large, one day move in the market or a ten percent move in a single week. For that matter, any significant move in one direction would leave these trades in ruin. That’s the problem with all the income strategies; they work for a while, but later, end up wiping out most of your trading account.
If you’re an experienced option trader, you know what I’m talking about. For example, if you’ve learned to trade the Iron Condors, and you’ve been trading the strategy for several years, you know your long term success is dependant on a certain amount of chance. True success comes from your ability to be lucky enough to not be in the stock market when we have a large move. Anytime there is a significant, directional change in the stock market, this strategy will always give up many months worth 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 you prove to be incredibly lucky, or have found a way to somehow avoid the stock market movements, then you can find great success in these strategies. However, we normal traders will never be able to tell when the market is going to gap, or when the market is going to trend in one direction for multiple weeks in a row.
Another serious problem with your typical income, option strategies is that they tend to lose when the market becomes volatile. If the market begins to go up and down, then the option trader is forced to adjust their positions constantly. If the trader does not adjust the position, then he is exposing his portfolio to catastrophic damage. Therefore, as the market moves up and down, the responsible option trader makes adjustments, and as the market whipsaws back and forth, there is no way to make money. In nearly all cases, volatile months become losses.
These problems are built in with your popular ATM, options income-strategies. Every trader who has a number of years of experience knows exactly what I am talking about. This is one of the reasons why I do not trade traditional option strategies any longer. Even though I had a great success at times, I found that over time I was not getting anywhere. Therefore I decided that I would be happier if my portfolio when either up or sideways. And even though I have some months where I do not make anything when I trade options, the really important thing about my trading style is that I have found a way to avoid the tremendous losses. In my opinion, this method of option trading is more fruitful over time than trading traditional option strategies.
After reading this, I hope you take home some insight into why you may or may not be making money on the stock market. If you’ve experienced any other the problems I’ve touched on in this article, you should consider learning the lower draw-down techniques San Jose Options has to Offer.
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