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 the Option Strategies mentioned earlier have two things in common. They all try to take advantage of time decay; in other words these strategies try to make money every single month from having a positive Theta position. We won’t go into the Option Greeks in this article; you have to keep in mind that Theta is a dollar amount that option traders collect each day that they are in this type 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.
Those of you that have been trading options for a number of years know exactly what I am talking about. If you learn to trade the Iron Condor for example, and you’ve tried this strategy for several years, you now know that long-term success really depends upon a certain amount of luck. The only way to find true success with this strategy is if you luckily are not in the stock market when we have a large move. Any time there is a significant, directional change in the stock market, this strategy will always give up many months of returns.
Just like the Iron Condor, a Calendar, a Butterfly, a Diagonal, a Covered Call, all of these strategies eventually cause catastrophic losses to your trading account. So although they may work for two or three months in a row, they eventually have one really bad month that that ruins all of the previous efforts and returns.
If you happen to be very lucky or have a way to somehow avoid the stock market debacles, then you can find great success with these strategies. However, the average human being will never know when the market is going to gap, or when the market is going to trend in one direction for a few weeks straight.
Another serious problem with the typical option strategies is that they tend to lose when the market becomes volatiles. If the market is going up and down, the trader is forced to adjust their positions constantly. If they don’t, they expose their portfolio to catastrophic damage. As the market moves up and down, or whipsaws back and forth, the responsible trader makes adjustments, though there may not be a real way to make money. In nearly all cases, volatile months become losses.
These are the inherent problems with your popular, options income-strategies. Every trader who has several years of experience understands exactly what I am talking about. This is exactly why I don’t personally trade traditional option strategies any longer. I tried for many years, and at times I had great success, but I found that over time, I was not getting anywhere. So that is when I decided that I would be happier if my portfolio went either sideways or up. So now when I trade options, I have some months where I don’t make anything, but the most important thing about my trading style is that I have found a way to avoid the catastrophic losses. I find this method of option trading is more fruitful over time than trading traditional option strategies.
I thank you for reading this article, and I hope I’ve given you some insight to why you may or may not be making money on the stock market with your option trading style. If you understand exactly what I am talking about, then you should really consider learning lower draw-down techniques that San Jose Options is teaching.
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