Trading Options Outside The Box
Part of the challenge in making money trading options (or just in the financial markets in general) is the zero-sum game factor. That is, for every winning trade, there’s someone on the other side losing money.
The problem is retail traders have to go up against huge trading firms and banks with endless resources. The market doesn’t differentiate the little guy from the 800-pound gorilla.
In options, it often means the most obvious trades will be too expensive for the average trader to afford.
That’s because the big players will get into the low hanging fruit trades for size before we even have a chance to open our Internet browser. As such, the option prices will be driven up because of demand.
For example, let’s say a biotech company is about to release results from a drug trial. After the results, the stock is either going to shoot up or collapse, as is always the case with these types of situations.
The obvious play here would be to buy an at-the-money straddle. Easy enough right? Nope. Go take a look at the straddle and you’ll see it’s ridiculously expensive. In fact, it’s most likely too pricey for the risk.
You see, demand for the straddle would be sky-high, and many traders would’ve put on the position well before even our earliest inclination. So what can be done?
Here’s the thing…
Sometimes, in order to get the most value from your options trades, you need to think a little outside the box. Instead of doing the most obvious trade, try to think what else may occur because of a certain scenario.
Let’s say the price of crude oil drops. An obvious trade may be to buy puts on oil companies. But, you can bet those puts will be expensive in such a clear case.
How about buying calls on trucking companies instead?
The theory is, trucking companies will save big money if gasoline prices are lower. They’re sure to show bigger profits if costs are down, but business conditions are otherwise the same.
I can just about guarantee you those trucking company calls will be cheaper than oil company puts. And, there are plenty of complimentary scenarios like this example – you just need to do a little research.
Sometimes, you may even find the out-of-the-box trades work better than the more obvious ones. Don’t be afraid to experiment a little with options (as long as you’re being cautious about how much you’re spending).
Yours in Profit,
Gordon Lewis
Category: Options Trading
