We discuss unsafe option trading strategies that are risky and unprofitable.
Sounds great huh?
My highest viewed video was on Safe Option Trading. So I guess you guys just don’t want to lose a lot of money trading options.
So now we are going to look at what not to do. If we can avoid making these mistakes, we can avoid those big losses that kill us.
Sure options are shed in a bad light and are thought of as gambling where people lose all of their money. And they can and will if you follow these strategies.
In this video, I’m going to show you:
- My least favorite and most unsafe option strategies that can be used to lose a lot of money
- We will show you real examples on the option trading platform
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Hey guys, Darren here. Whoo do we have a video for you here today.
For me it’s super important that we are using the safest ways to trade options while understanding the difference between high probability trades and risky bets.
In this video we are covering what not to do!
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Before we start, be sure to hit that like button and download the FREE options Workshop in the link below.
It talks about the two main benefits of trading options over buying stocks.
DISCLAIMER, I am not a financial planner and I am not recommending trades. Please do your own research and if you are new or learning options, I recommend you start small.
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What are some of my least favorite and most unsafe option strategies that can be used to lose a lot of money?
Guys, we are talking about buying options.
Buying Options
Why is buying options bad? Math
The easiest way to show this is on the options trading platform.
Tastytrade is one of the best and most intuitive for trading options. I’ll put a link down below. Right now you can get up to $3000 when you fund an account.
So many people want to buy Call options and then hope the stock price rockets to the moon.
Guys, just ain’t gonna happen!
Punch in AI in the upper left on the trade page.
Click on the Bid to Sell the 42 Call option. We collect $180 for doing this since 1 option contract controls 100 shares of stock.
We click on Curve mode and see the profit zone in green. As long as the stock price stays below the 42 short strike at 28 DTE we keep the entire $180 collected when we place the trade.
You can see there is a 82% POP or Probability of Profit.
Now let’s look at buying the Call option hoping that the stock takes off to the moon. We click on the Ask to Buy the 42 Call option and since we are buying the option we pay a $190 debit.
Click on the Curve mode and we see the profit zone skyrocketing up and going to infinity. That is what option buyers like to see!
However, look at the POP. The Probability of Profit is only 17%! So the chances of us making a single penny are very low.
So we Sell options instead of buying them for the most part!
The only time that I really look to buy options is with LEAPS when I go out 1-2 years and the theta decay or time value doesn’t kill me.
Another one of my least favorite option trading strategies that can lose you a lot of money is:
Trading only one side of the market
Guys, the stock market doesn’t move in just one direction up!
Let’s look at the SPY chart which is the S&P 500 or total market, the market moves in jagged stages up and down and sometimes trends one way or another. So it doesn’t move in a straight line up or down.
So if we are trading in the short term, why not make money on both sides of the market?
Plus, we know that every few years there is typically a pretty big move in the market. We can see where in March 2020 12% in a day and close to 30% down very quickly.
Now if you are only long stock and the market then you lose that full amount and it takes a lot of time to make that back up when the market does rebound.
If you were trading both sides of the market and were delta neutral, then you may only lose ½ that amount and you may even make that up on the winning short sided trades. Then you just roll your long trades out in time and wait for the market to rebound.
The next one of my least favorite option trading strategies that can lose you a lot of money is:
Trading too big
Like how I made that one bigger…
Trading too big is directly related to the drop or correction in the market we just talked about that may happen every few years.
We always want to have money on the sidelines ready to take advantage of any large drops.
It’s human nature to get greedy when the market is moving up.
Warren Buffet’s famous quote “Be greedy when others are fearful and fearful when others are greedy” makes a lot of sense.
Options are leveraged and if we trade too big then we can blow up our account and throw ourselves out of the game.
The last of my least favorite option trading strategies that can lose you a lot of money is:
Trading incorrect option strategies in wrong IV
I know there are many more. And I’m sure I’ll find them.
Understanding implied volatility is important when it comes to option trading. Implied Volatility is an expectation of where the stock might move in the future. Depending on how high the implied volatility is it will cause option pricing to increase or decrease to compensate for the volatility.
When implied volatility is high then option premiums are high. And vice versa when IV is low the option premiums are lower as well. So if we are selling options, which is what we want to be doing most of the time we want to do this in high IV so that we collect more in option premium.
So stock Volatility is a measure of how much a stock’s value fluctuates up and down.
If the black line above is stock A then you can see that it has very little volatility and stays in the 100 range. The frequency and magnitude of its moves are very small.
Stock B in the Blue has much higher volatility and makes bigger moves even though it ends up at the same place, $100.
So we like to sell options as opposed to buying them. When IV is high we collect more in option premium so we want to do it in high IV. Preferably above 20 or 30.
So we want to sell credit spreads, iron condors, puts and calls. But all in high IV.
One time when we may want to consider buying options is when IV is low and the stock price is low as well. We do this with a LEAPS option.
We have other videos where we discuss and break down LEAPS options. Be sure and check those out.
This is a strategy where we buy longer term options 1- 2 years to expiration. We want to do this when IV is low. Then we buy the option on sale and if and when IV expands our option prices expand and therefore we make more money.
Key Takeaways
Don’t buy options sell them instead except for the possibly LEAPS and then you are buying 1-2 years out to expiration so the theta decay doesn’t eat you up
Don’t trade only one side of the market. Guys the market moves in different directions and no one can predict where it will move in the short term
Don’t trade too big. We don’t want to blow up our account and we want to be able to take advantage and buy in when there are dips
Don’t trade incorrect strategies in the wrong IV. In other words sell options for the most part in high IV. That is the ticket!
Alright guys, if you are a beginner and this sounded confusing do not worry. It did for me as well originally. We will be continuing to cover the details in future videos. We will continue to learn and succeed together.
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I’ve put a link down below for the FREE Options Workshop. Be sure to grab that.
Remember to hit like and subscribe and leave a comment below with your thoughts on the video.
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