Whether trading puts and calls or fantasy running backs and wide receivers, smart planning and preparation, active management, and a contrarian eye are select skills that can facilitate success.
The world of options, like the world of fantasy football, can be a scary place for rookies. However, while the rules, the research, and the rhetoric of each are often intimidating in their own way, the keys to both options trading and fantasy football success are actually fundamentally similar.
With the NFL season now underway and fantasy football fans (including myself and several of my colleagues at Schaeffer's) very busy, we thought we'd examine the eerily parallel path to both options trading and fantasy football victory.
So, whether you're about to embark on your option-trading journey or corral your cheat sheets at the onset of football season, take a few minutes to consider the following tips, which are applicable to both situations.
1. Don't Play If You Can't Pay
Options: Don't risk precious capital if you can't afford to lose it. When playing with options, you're going to have some losing trades along the way.it's inevitable.
As such, it's not wise to wager bill money or your life savings, no matter what kind of "hot tip" or "good feeling" you have beforehand. As it states in Schaeffer's 10 Days to Successful Options Trading, "Intelligent trading decisions are rarely made when 'scared money' is involved."
Fantasy Football: Simply participating in a fantasy football league is fun. However, it's even more fun when you win. Don't be the guy dodging your dues-it's not fair to the winner at payout time. If you don't want to fork over the cash on draft day, there are plenty of online leagues that let you join for free.
2. Practice Makes Perfect
Options: Before risking precious capital, try paper trading first. Utilizing a virtual trade tool allows you to test your trading knowledge, theories, and risk tolerance to see which strategies work for you and which don't.
Make sure to take diligent notes in order to analyze each trade's aftermath, which will help you discover what kind of options trader you are and strive to be. Most option brokers have a paper-trading platform.use it!
Fantasy Football: Before you head to your league's live draft, try a mock draft first (you can find a plethora of free mock-ups online or in app stores). The real deal can get pretty intense, as there's often a time limit on how long you have to make your picks. Plus, not every round will go according to plan, so expect the unexpected.
3. Don't Play By the Seat of Your Pants
Options: Research, research, research. It's crucial to examine a security thoroughly before initiating an option trade. For a multi-dimensional, well-rounded analysis, the Schaeffer's Expectational AnalysisR methodology encourages investors to study a stock from a fundamental, technical, and sentiment perspective.
Fantasy Football: Research, research, research. While it's a rare feat to know the stats of every NFL player, it's not smart to "wing it" without doing your homework.
Be as prepared as possible before the draft, and study a variety of cheat sheets and analysis for a balanced outlook on prospective players. In addition, don't forget to scan the latest injury reports, as fantasy publications are often published early in the preseason.
NEXT: Don't Fall Victim to Outside Factors
|pagebreak|4. Consider Outside Circumstances
Options: On the same note as No. 3, it's essential for option traders to be aware of outside circumstances that could be a catalyst higher or lower for the underlying stock. For instance, before implementing an option play on stock XYZ, make sure you check the company's corporate calendar. A significant event like a date in the earnings confessional, or the release of monthly sales figures, could potentially impact your strategy.
Fantasy Football: While a player could look good on paper, his performance could be affected by circumstances outside his control. Consider a team's bye week or strength of schedule, for example, or the potential impact of a less-than-stellar quarterback on a wide receiver. (Or, in the case of the Bengals, make sure to check the local court dockets and retirement announcements!)
5. Do the Math
Options: Before entering a trade, plot the numbers. You should understand the breakeven levels, profit/loss potential, and any commissions or margin requirements to best understand where your play stands at any given time. For in-depth analysis on a variety of strategies, check out the huge archive of educational articles in the MoneyShow.com Options Trading section.
Fantasy Football: Take note of your league's scoring system before the draft. If your particular league awards more points for running yards than receptions, you may want to consider drafting a running back before a wideout. In the same vein, while Drew Brees is inarguably one of the best QBs in the NFL, he's slightly more appealing in fantasy leagues that don't dock points for interceptions.
6. Get What You Pay for
Options: It's basic economics that an item in high demand will command a higher premium. Options are no exception to this rule. By comparing a stock's historical volatility to an option's implied volatility, you can gauge whether the option is relatively cheap or expensive at the moment.
For example, a front-month call with an implied volatility of 80%, juxtaposed with the underlying security's one-month historical volatility of only 50%, will be relatively costly. However, seasoned option speculators can take advantage of escalating implied volatility by employing strategies like the long calendar spread.
Fantasy Football: In some fantasy leagues, you draft a player by outbidding everyone else. In these instances, make sure to budget your money before the draft, so as not to overspend on one player early on and short-change yourself in the final rounds. (For example, don't spend so much cash on hopes of an Arian Foster repeat that you end up stuck with Jordan Palmer as your starting quarterback.)
7. Hunt for Sleepers and Busts
Options: As contrarians, we like to find outperforming stocks surrounded by skepticism. If the shares of an equity have powered higher on the charts, but the Street still remains leery, the unwinding of that pessimism (in the form of upgrades, price-target boosts, a short-covering rally, or a reversal in sentiment in the options pits) could all act as catalysts even higher for the stock.
On the flip side, contrarians also enjoy foraging for underperforming stocks surrounded by optimism. If a security is in the midst of a long-term downtrend, but the Street remains bullishly biased, an unwinding of that optimism could pressure the stock even lower as the bulls abandon ship.
To find potential contrarian plays, check out the Schaeffer's Stock Screener.
Fantasy Football: Ahead of your draft, research undervalued players with star quality, as they could be this season's sleeper picks. These often take the form of rookies or recently traded players that tend to get drafted in the later rounds.
Meanwhile, don't waste a high draft pick on overvalued players with little chance of making an impact. These busts often turn out to be the aging or injury-prone players that spend a large chunk of the season on the bench.
NEXT: Hedge Your Bets
|pagebreak|8. Don't Be Afraid to Handcuff
Options: Unsure about the future of a stock or particular sector? Try hedging your bets with pairs trading. By simultaneously opening two related option positions, you allow yourself a safety net to guard against an unanticipated move in a specific sector.
For example, to hedge against potential weakness in the "alphabet sector," an investor could buy a call on outperforming XX, and simultaneously purchase a put on underperforming rival YY. As long as the profits from one trade outweigh the losses from the other, your pairs trade is money.
Fantasy Football: Unsure about the future of an injury-prone quarterback? Try hedging your bets with a handcuff. By picking up the player's backup, you can guard against any season-ending injuries. In the same vein, running backs who share carries should also be considered as a potential duo on draft day, though only one usually emerges as the featured back.
9. Know Where You Stand
Instead, avoid clinging to losing trades and consider setting stop-loss levels to prevent a massive deficit in your trading capital.
Fantasy Football: Don't be a passive fantasy team owner (unless you're playing me that week!). But seriously, not paying attention to your lineup could cost you the win. For example, being unaware of a player's bye week could leave a critical void in your lineup. On that same note, pay heed of a player's health status. If it seems like your kicker is eternally on "injured reserve," don't wait too long to drop him for a player with fewer health concerns.
10. Lose with Dignity
Options: As mentioned earlier, all option traders will take a hit every now and again. The trick-besides proper allocation and portfolio management-is to take the losing trades in stride. Have realistic expectations heading into every trade, don't let fear or greed outweigh common sense, and most importantly, stay in the game.
Fantasy Football: As much as it hurts to lose a hard-fought battle to your senile uncle Morty, remember that playing fantasy football is a game. Just as no one likes a showboat, nobody enjoys a poor sport, so stay classy this season and, more importantly, have fun. Good luck!
By Andrea Kramer, contributor, Schaeffer's Trading Floor Blog
