Option trading doesn't have to be complicated, says John Carter, explaining two ways anyone can use options to either buy stocks without huge capital outlay or earn extra income.
We’re talking option strategies with John Carter. John, in this kind of market, a lot of people looking to hedge or leverage some of the upside and protect against the downside start thinking about options. What option strategies should they look at?
Options can get very complicated very quickly. I talk to a lot of people who say options get over their head very quickly, and it doesn’t need to be that way.
I think that is just because by the very nature of options, you can do these three-legged, clipped-winged butterflies, and different things like that. Well, just because you can do that doesn’t mean you should.
I really think the easiest way to use options is simply look at it as a cheaper way to own the stock. That is the most important thing.
So, Apple (AAPL) at $500 a share, if you are buying 1000 shares, you have to lay out half a million dollars; or you could buy ten slightly in-the-money contracts and it’s a whole different ballgame. You are then participating in the price movement.
You want to do analysis on the underlying stock, and if that analysis is bullish, great, buy some in-the-money calls, like Delta 70 or above. If it is bearish, you can do the opposite. Really, beyond that, things are actually very simple.
The only other thing that I like to do is sell premium. What that means is you take those options that are out-of-the-money—a couple strikes out of the money—and you look to sell them.
A lot of times, I will just buy an in-the-money call for directional purposes, and if it starts moving towards my target, I can actually start selling some of the out-of-money calls against it. Then those actually start losing premium, so it is almost like a poor man’s covered call.
Just think of it as a cheaper way to own the stock. That is your first and foremost priority with the options market. Then, from there, there is an opportunity to sell some premium.
You don’t have to sit there and spend your whole day trying to get Delta neutral and have all these different positions on for different contingencies.
Sometimes you get into a play that goes against you. Then, instead of just taking it off and taking a stop, a lot of people will then put on three different option strategies to help balance that out. Again, that is just making things too complicated. To make money in options, you have to keep it simple.
I think that is probably a universal recommendation for a lot of strategies, especially in trading.
Well effective trading is like an effective marriage: you have got to keep things simple. Don’t look at a bunch of other things; you focus on what you know best and go from there.
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