It seems like a lifetime ago… But it was just last year.
In 2021, everyone seemed to be on Robinhood. I saw people trading at the rodeo. They traded at after-school activities. I even saw an older woman using Robinhood while waiting to check out at the grocery store.
The online app claimed to make trading simple. I never understood that. All online apps make trading simple.
No, what Robinhood really did was make trading fun, cool, and popular. Options trading especially.
Don’t get me wrong, I believe options should be popular. Because options offer options, and that means they offer a strategy that could be right for almost every trader.
But investing and trading isn’t as fun, cool, or popular as it was a year ago. I don’t see Robinhood while I’m out and about anymore. With the market volatility, a lot of people are sick of losing money and have given up. People are back to checking their email or reading celebrity news while they wait in line. I’ll bet this is even more true for the ones that traded options.
Options are volatile. It takes years to learn how to trade them. Robinhood made it too fun and easy to do. And I think many people suffered losses they didn’t expect.
That’s a shame. Because options are so versatile, they should be in many more portfolios.
If you’re one of those people that gave up on options trading this year… and also somehow managed to start reading this newsletter…
Then I want to show you why right now’s the perfect time to revisit them.
Options are complicated. They have a high learning curve. But once you know what you’re doing, there’s no better way to structure a portfolio in the market. We’re here to make sure you know what you’re doing. And today is your first step on the path back to options mastery.
The Versatility of Options
Options are great for speculating on the direction of the trend. If you think a stock is going up, buy a call. Buy a put when you expect a price decline. That’s what most people use them for.
Anyone paying attention knows that speculating on trend direction hasn’t been quite as easy this year as it was last year.
But that’s okay… because options offer so much more than that.
Options also offer potential profits when you don’t have an opinion on direction. Here’s what I mean…
Imagine a stock earnings report is about to come out. You know the stock often rallies on the news. But when the company misses expectations, the stock can also plummet.
So you’re confident the stock will move, you just don’t know which way. If you only buy puts and calls to speculate, you would think there’s no trade.
But there is. It’s called a straddle.
In a straddle, you buy both a call AND a put. It might sound contradictory, like the two will cancel each other out, but in practice it really makes perfect sense.
The call benefits from a rally. The put profits from a selloff. In each trade, one option should win, one should lose. Ideally, one option wins more than the other loses, handing you a net profit.
I’m testing a straddle strategy with the True Options Masters team. It’s going well. And I’ll share results soon.
But straddles are just one way to trade options. Another way involves the exact opposite prediction: that prices won’t move very much at all.
For that, you can trade a credit spread. This is when you sell to open one option, and then buy another option with a different strike price. The option you sold results in immediate income to your trading account. The one you bought offsets some of what you earn, but also protects you if the trade goes the wrong way.
With this strategy, you want to figure out where stocks will close by expiration. If you think the S&P 500 won’t break $380 by the end of this week, you could sell a spread that benefits if that doesn’t happen.
Even here, we’re really just scratching the surface of what’s possible with options. Many traders employ many different methods to suit their goals.
It’s important to understand that options can do a lot more than help you leverage directional bets in the market. Knowing and practicing these more advanced strategies is what turns rookie options traders into masters.
Regards,Amber Hestla Senior Analyst, True Options Masters