My Unique Approach to Trading Options

01/22/2016 8:00 am EST

Focus: OPTIONS

Martin Rimes of HitTheMarkTrading.com explains why his approach to the market is different than most other option traders.

I think the most difficult aspect of options trading is sifting through the morass of information related to how a person can trade options.

In my opinion, there are too many rabbit holes one can fall into wasting time and energy in vain attempts to gain an edge. I am talking about excessive reliance on volatility, excessive focus on Greek measurements, and overly complex strategies that seemingly ignore the idea the market can and will do what the market decides, throwing all analysis out the window.

Just as there are "hunters and gatherers," there are also different types of traders. For those who have a mathematical mind, or those who believe everything can and should be quantified, then I think adherence to volatility, gamma, theta, etc. is like a siren song of attraction.

Obviously, market makers who work on smaller profit levels and high volume that constantly offset the risk involved in buying and selling options to others must work with higher-level concepts. This is why if you tour the Chicago options exchange, you see hundreds and hundreds of screens with perhaps only five showing charts.

The market makers live and die by the math of option trading. As markets change unexpectedly, they offset positions easily and pay much less in commission than the retail trader.

Then there are the rest of us-normal people who perhaps are more visual, more in tune with the macro environment, and have little need to sit in front of the computer constantly watching option prices fluctuate. We believe chart prices are markers of crowd behavior. We believe this behavior repeats and we see the same thing happen over and over and over again. We trade on this expectation of repetition.

The industry-marketing folks will always promote a more complex method of trading...especially the idea of making adjustments. Every adjustment is another commission.

It's not that we ignore volatility. In fact, we embrace the volatility concept. It's not that we ignore the Greeks; in fact, we place "delta" in prominence for option selection. The difference in how we trade is convincing ourselves that everything "they" measure is inherent in how we trade using momentum and trend.

So if we have a signal to sell calls, our momentum indicator is calling the trade when call volatility is high. What is the mantra of "experts" who focus on option technicals? They always say, "Sell volatility." Well, we do this without any reference to monitoring volatility.

The difference is our ability to read charts while trading in a moving market.If markets do not move, we simply look in our tool bag and pull out non-directional trading strategies. Nothing special.

Next: We use our eye on the charts as the judge

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We use our eye on the charts as the judge. Is price sideways in a range? Well, maybe it is time for an iron condor or a straddle strangle. And I am not sure what the other side would think of our occasional grave dancing trade, such as the X trade and TBT or the rare lottery-ticket trade we take from time to time!

I think trading is a field where less is more, and where you should focus on what "speaks" to you. For me, looking at the chart and seeing time-proven price patterns or seeing an indicator provide a trade signal is where the focus should lie. If we can stack the probabilities of follow-through in our favor, we can let the options take care of themselves...they always do.

I rarely worry about making adjustments to a position. Most of the time, when you are wrong you are wrong. I have played that game of continual adjustments, ignoring what the chart is telling you while you work on building a house of cards. Brokers love adjustments and promote such strategies.

The time-proven keys are always manage risk and cut your losses while they are small. All the knowledge of volatility and Greeks cannot help a trade gone bad.

So we keep it simple. We focus on a basket of momentum stocks and watch the general tide of the market. We trade with the market flow, expecting the market tide will lift our momentum stock. We respond to macro events, because trading in the 21st century has changed to high correlations and central banks calling the shots as fundamentals take a back seat.

I know so many people who are intimidated by the thought of trading options, and their eyes glaze over at the thought of options trading. Most of these folks are reluctant to purchase a book and study the concepts...they would rather trade what they know. There is nothing wrong with trading what you know!

I often hear of brave souls who purchase an option book and it turns out a cure for insomnia. Then the trader tells me, "I tried, but just could not get it. I kept falling asleep!"

One trader told me after reading an options trading book, instead of eating the steak she felt she ate the whole cow. Great analogy! (I read that book as well and found it totally useless).

The secret to learning options is breaking concepts down into very simple terms-and pacing yourself. All the major trading firms and large traders employ the most basic option strategies.

Typically, it is the more sophisticated trades that end up burning the trader, and institutions who are locked into a paradigm that price must return to a mean.

Why take those risks when you can keep options trading simple and approachable?I suggest you ignore the "noise" and focus on the simple. You can learn options; you can trade in relaxed fashion with defined risk. Options are not for everybody, but then again, I think everybody should take a look at them for both stocks and futures.

Martin Rimes can be found at HitTheMarkTrading.com.

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