Maria’s Note: Maria Bonaventura here, Rogue Economics’ senior managing editor. Today, we pass the pen to master options trader Jeff Clark. Jeff has traded options for nearly 40 years. And over his career, he’s used his own trading techniques to generate millions of dollars for Silicon Valley CEOs, pro athletes, and pension funds…
Options are a great way to reduce your overall risk – and they require minimal upfront investment. So they could be a huge benefit to everyday investors during times of volatility like we’re seeing now. But in order to successfully trade options, you need the right strategy. That’s where Jeff comes in…
Most people say option trading is risky.
Novice traders often don’t take the time to learn the right way to use options. They jump right in – thinking, “I got this.”
They gamble, blow up their accounts, and then walk away penniless and swearing off options forever.
Even experienced traders sometimes get caught up in the allure of fast gains. They overleverage their positions – take a bigger position size than they should – and then take a hit.
All the option traders I know, including myself, have blown up their accounts at least once.
But it’s not the option that’s risky… it’s the strategy. And when used the right way, options are far less risky than trading stocks.
You see, most people use options the wrong way. Most people use options to increase leverage… to get more “bang for their buck.” In other words, most people use options to increase risk.
That’s wrong. That’s the exact opposite of what options were designed for.
The options market was created so investors could reduce risk. Options allow investors to hedge their positions… and to risk much less money than they would buying a stock outright.
Let’s say you want to buy stock in Company X. It trades for $10 a share. You could put up $1,000 to buy 100 shares… But you can control the same amount of stock with one option contract.
You can buy a contract for, let’s say, $50… and leave the other $950 in your account.
If Company X’s stock goes up, you’ll make money. If the stock goes down, the most you’ll ever lose is that $50. That’s a 100% loss… but it’s a lot less than potentially losing 20% or more of the $1,000 you risked buying the stock.
This is a simple example. And it’s the simplicity that proves my point. Options allow you to risk much less and profit just as much as buying stocks.
Biggest Beginner Mistake
But that benefit disappears if you overleverage the trade and take on a larger position with options than you would otherwise take with the stock.
That’s the biggest mistake most novice option traders make.
Instead of replacing a 100-share purchase with one call option, they take the entire amount they would have allocated to the stock and buy a much larger position with the options.
Rather than buying one call option for $50 and leaving the remaining $950 in the bank, novice traders take the entire $1,000 and put it into buying more call options.
They end up buying 20 call options to try to get more bang for their buck. What would have been a 100-share purchase has turned into control of 2,000 shares.
Instead of using options to reduce risk, they’ve increased their risk 20 times.
Losing 100% on an overleveraged trade would be a disaster. And it’s why most folks think option trading is dangerous.
But it’s not dangerous if you trade options the way they were originally intended… as a way to reduce risk.
Limit your option exposure to control just the number of shares you would normally purchase. Leave the rest of the money in the bank. Then it won’t be so bad to lose 100% on an option trade.
It will almost always turn out better than what you could have lost on the stock.
You Can Safely Trade Options
I’ve been using this strategy for decades.
The simple fact is, for 20 years, I handled more than $200 million in Silicon Valley for some of the wealthiest CEOs in California. I’ve even managed accounts worth as much as $20 million apiece for entrepreneurs, startup founders, and professional athletes.
And now, I want to help you safely and successfully trade options. Nothing makes me happier than helping everyday folks make money trading the markets – especially during economic volatility and market crashes.
I’ve recorded a special video to show you how. In it, you’ll get a first-hand look at how it all works… as I teach my 22-year-old son Grant how to trade options using my strategy.
You can watch my video by clicking here.
Best regards and good trading,
Editor, Market Minute
P.S. You can grab one of my top recommendations for free if you tune in to my video. It’ll be a great place for you to get started. Just click here…
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