Options

The Most Versatile Trading Vehicle Ever?

By Lee Lowell  |  January 23, 2019

What do you think these terms have in common?

Condors…

Iron butterflies…

Christmas trees…

Ratios…

Fences…

Collars…

Diagonals…

Calendars…

Conversions…

Reversals…

Backspreads…

Straddles…

And strangles.

They’re the names of specific option trading strategies that 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 of them 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…

For instance, 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 me now) 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 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.

Why?

Because they’re too sophisticated and only serve the purpose of the hyperactive floor trader that needs to make multiple trades a day to stay afloat, and to help facilitate complex orders for institutional customers.

For us “average” folk, I recently 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 trades 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.

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 although I focus on specific types of options trades, it doesn’t mean that others can’t have successful systems of their own. It’s just like the market-maker versus the average trader, both of whom approach the market from different angles and perspectives.

Take my colleague Adam O’Dell for example. He’s an options guy just like me, and although I’m a big believer in option-selling techniques, Adam focuses on option-buying techniques, and has a great track record doing it.

Yesterday, he highlighted the ease of use behind his strategy, and mine. It’s considered to be a lazy way to invest, which isn’t always the best way to be. But when you’ve got passive income and the freedom to do what you want, who’s going to complain about be a little lazy, right?

In the end, options trading is extremely versatile, only limited by your imagination of what types of directional opinions and timeframes you have.

I’m a big proponent of the options market and have used it profitably for the last 27 years. Maybe it’s time you should too.

Lee Lowell

A former Wall Street insider and floor trader, Lee Lowell has worked in the market for nearly 30 years now. He began his option trading career in 1991on the floor of the New York Mercantile Exchange (NYMEX) in New York City.MORE FROM AUTHOR