Condors, iron butterflies, Christmas trees, ratios, fences, collars, diagonals, calendars, conversions, reversals, backspreads, straddles, and strangles are all specific option trading strategies you can execute based on your specific goals and outlook for a particular stock. (Don’t worry if you’ve never heard of any of them… most people haven’t.)
Each one of them is tailored to take advantage of a specific directional opinion, or even a no-opinion. Each one can take advantage of a certain timeframe — days, weeks, months, or years. Some can be used in conjunction with other options strategies to form even more complex profit and loss scenarios.
The choices are almost limitless. But the uses can also differ based on the type of options trader you are — option buyer, option seller, etc. That’s one of the best attributes of options trading: versatility.
My Time in the Pits
During my years as an option market-maker in the commodity pits of the New York Mercantile Exchange (NYMEX), I executed every single one of those types of trades listed above, and probably a few others I may have forgotten.
My goal as a market-maker wasn’t to take a directional position in the underlying security (crude oil and natural gas), but to make a profit by scalping between the bid and ask markets… as many times as I could during the day.
You see, as a market-maker, it was my job to set the bid and ask prices for any option contract that existed on the NYMEX for crude oil and natural gas.
Customers from all over the world would come to us to trade these contracts, and they had to accept the terms (bid and ask prices) that we would provide. That typically meant that we would be able to buy the option contract on the bid price and/or sell it on the ask price.
For those of you (and now myself) who trade any type of security — whether it’s a stock, bond, commodity, etc. — we’re at the mercy of the market-makers and we must basically buy at the ask price and sell at the bid price. This is reverse of the market-maker’s action and one that puts the average investor (us) at a disadvantage.
When you have the capability to set the market, and do that many times over each day, you’re going to have an opportunity to make lots of money. Such was the life of a market-maker until technology, high-speed internet, and low commissions came into play.
Now, the playing field has been leveled so much that, although the market-makers might still hold a slight advantage, the average investor can come away feeling like they have a chance to compete.
A Strategy for Every Whim?
Although the strategies I highlighted above are still in existence today, the ordinary investor will never use most of them. They’re just too sophisticated and only serve the purpose of the hyperactive floor trader who needs to make multiple trades a day to stay afloat, and to help facilitate complex orders for institutional customers.
For us “average” folk, I penned a five-part series in The Rich Investor that outlined the four best option trading strategies you’ll need for success in 2019.
These are timeless strategies that never go out of style, and ones that I highlight in my book, which has been an options-trading best seller on Amazon since its release in 2007.
Again, one of the best attributes of options trading is its versatility — its ability to offer any type of directional trade, for any period of time, with many degrees of risk and reward, especially using my four methods and those of my colleague and friend, Adam O’Dell.
While I’m an options seller, Adam is an options buyer and he has a great track record doing what he does.
In the end, options trading is only limited by your imagination of what types of directional opinions and timeframes you have.