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Option Trading - Thinking "Outside the Box"
We are fortunate to have Dave Rivera, a professional trader and options expert to put together this article for us. Even if you are not presently using options you should read this article to help with your trading education.
I started comparing how expensive options were in relation to the other strike prices in the same month and to the other months. I wanted to know based on the price per day which options were more expensive.
The first 1 or 2 option months, as everyone knows loses time
quickly. The at the money strike prices are very expensive
to the out of the money strike prices. Since there is not
time left, how much can they charge for an out of the money
The next several months, the opposite is true. Compared to each other, the strikes that are closer to the money are cheaper in terms of price per day than the options further out of the money. Let me explain it another way using the S&P market.
6 days left at the money option cost 12 points
Sell 6 day at the money and sell 70 day out of the money.
Buy 6 day
out of the money and buy 70 day at the money. This will be
done for a
The "smart money", commercials will not be scared
into selling when
a market they have purchased drops even further. They know
There is a famous book, "You Can't Lose Trading Commodities".
author buys commodities and then just waits for the market
You need a big bankroll for this. Personally I know corn won't go to $1.00 but what if it did? I want to minimize the risk in case I want to end the trade.
I started trading the Soy Complex this way several years ago. Not with options. Strictly futures. I bought what was similar to a crush spread. I increased the contracts as the market went against me until the spread rebounded a little. Since I increased the contracts I didn't need the market to come back to where I started. It only had to rebound to the next level.
Black Jack players did this until Casinos caught on and put limits on bets. It is a known fact that futures traders make good gamblers and professional gamblers make good futures traders. I am against gambling but even gambling done with a system is not really gambling.
These card players would bet something like this: $5 lose, $10 lose, $20 lose, $40 lose, $80 win. The losses add up to $75. They would win $80, so the profit is $5. Not a lot, but they would do this all day. Black Jack is just under 50% probability for the player.
The problem is there is a slight chance that you could lose 40 times in a row. Now with Commodities we have a 50% probability and we won't lose 50 times in a row because the market can't go below zero.
Now before I go any further, I need to tell you that I am not recommending you double down on your trades. What you can find are markets that are near their lows where you can do a small scale trade. Spreads offer even better opportunities. They have a closer range (high to low).
By now you can see we only use this to go long a market since we can never be sure how much a market can go higher. First we need to find a market that is low already so we won't have to wait that long and also so there will be less capital needed.
I prefer to trade this using options. There are many ways to do this. You could buy an option in a market like soybeans and choose how many cents the market will drop before you buy more. The problem is, an option is a wasting asset. The Theta (time decay) would cause you to lose money.
I use spreads so I am not paying for time decay. I will probably sell more Theta than I buy, so if the market does nothing I will make money just on time decay.
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