The Beauty of a Non-Directional Strategy
02/09/2015 8:00 am EST
You've heard the saying that you can make money in options even when you're wrong, and here Greg Loehr of OptionsBuzz.com demonstrates how you don't even need to pick which way a stock is going in order to make money.
One of the truest things I've heard recently was "It's SOOOO nice not having to pick which way the stock is going!" That came from a one-on-one coaching student of mine that had fallen into the trap of over-analyzing charts and looking for "that one right" indicator. Not having to pick a direction had taken a huge burden off her shoulders.
I don't know how many times I've told people that trading is not about being right-think "credit spreads and calendars"-but rather, it's about managing the trade. And with the non-directional strategies, like this trading student is learning, direction is even less of a factor.
Here's a chart of AAPL. Which way is it going? You can click to open a larger chart in another browser window.
Most people, I think, would say that the stock is going up. In reality, you don't really know. We can say that the stock has been going up, and this is where the technical analysis discussion begins and drags on into the night. There are those on one side that absolutely believe they can reliably pick stock direction (I can't even do it unreliably), and then there's Dr. Burton Malkiel on the other. So in addition to the argument of where AAPL is going, there's the argument of whether technical analysis even "works."
Let's not get into either so no one's feelings get hurt.
Instead of picking a direction and risk pulling a "Wrong Way Corrigan," let's go with a non-directional approach. See the green graph in the middle of that picture? That's a summation of the average volatility of the options. It's pretty low compared to the range it's been in over the past year. There's nothing that says the volatility can't go lower, but there are a couple things that make me think a non-directional trade is worth looking in to.
Remember, with a non-directional trade like a strangle we don't care which way the stock goes. Hence the name. We want either enough stock movement to overcome the theta. Or a big enough rise in the volatility to overcome the theta, or both.
With AAPL, the stock has been recently moving enough to cover the theta. That's good, especially if it continues. And the volatility has been showing some signs of picking up. Again, that's good, but we'd obviously like to see either, or both, continue.
Probably the best part of this trading idea is that if we're wrong and the stock doesn't move, it's a pretty low-risk approach to trading with the volatility in the basement like it is. It cango lower, but I'd take that risk over picking the direction.
By Greg Loehr of OptionsBuzz.com