Option Trading

You wouldn’t buy a car that didn’t go in reverse. But having investments that can profit when the market goes backwards is just as important as having a car that can back up.

We’ve seen this fact play out in the markets lately: Long-only equity portfolios will not perform well during bearish market cycles.

Therefore, you have to make certain that your portfolio has access to investments that go backwards AND forwards. You need to employ strategies that can profit during up markets, down markets and sideways markets.

We use options strategies because they have the potential to make money in any type of market environment.

If used appropriately, options are a powerful investing tool for individual investors. Innovations in technology have allowed the retail trader the ability to trade on an equal playing field with the professional options trader. Individual investors now have the opportunity to participate in one of the most important developments in the field of investments of the last 25 years.

Our goal in writing this detail section is to provide a practical guide to some of our favorite options strategies that we use in our Income Cycle portfolios.

We will provide a map that will guide you through the construction of these options strategies and will highlight the risk/reward profiles that each strategy carries. These options strategies will work as a complement to your investment objectives.

We do not offer a "get rich quick" strategy – simply because we seen these strategies fail too many times to risk our money and yours chasing ridiculous gains.

Rather, we employ several sound and statistically-proven options strategies that are designed to produce consistent gains over the long term.

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Why Diversify?
Utilizing a variety of options strategies is much like investing in a diverse array of stocks. As we all know, diversification is the key to long-term success. It is not only mathematically logical, but also a financially sound practice. Why fight the likes of Nobel laureates Markowitz, Miller and Sharpe, the fathers of portfolio diversification?

Our strategies can easily be integrated into your current investment portfolio even if it is an individual retirement account. I would hope that you would NEVER “put all your eggs in one basket.” It is too risky; if you drop the basket, you can lose everything. Smart investors would never employ this type of reckless investing, as the risk far outweighs the reward.

We seek to achieve superior risk-adjusted returns through short-term trading, switching between options in highly liquid exchange-traded funds (SPY, DIA, QQQQ, IWM, etc.) and cash. Each strategy operates in conjunction with buy or sell signals generated by our own proprietary models.

It is our hope that through this website and subsequent use of our services you will become familiar with the most important aspects of stock options so that you can start earning a steady income and boost your portfolio returns using options-based investing each month, regardless of the market's direction.

Why Options?
Trading options are nothing like trading stocks. Most investors make the mistake of bringing their experiences and ideas about stock investing into the field of options. They view options as a leverage investment on a given stock or ETF and nothing else.

Whatever direction the market moves decides the fate of your trade. This might be the case when trading stocks, but it doesn’t have to be with options.

Options traders do not view the markets as binary (long or short). Rather, an options trader makes an assumption based on his view of the market. He/she determines how bullish or bearish he/she is and applies the options strategy that best serves the assumption. Once the options trader chooses an appropriate options strategy he/she has the ability to choose a specific probability of success and the risk tolerance of his choice for each and every trade.

You simply can’t craft such specific and effective investment theses in stock trading.
Stock traders do not have the ability to be partially correct and still make exceptional
returns. But, that’s the whole point of using options effectively: putting yourself in the position to make money, even if you’re only partially correct in your assumptions.

Investing in options can allow you to make money on the randomness of the market – bullish, bearish or neutral, it doesn’t matter – as long as you give yourself some cushion.
I realize this might be a foreign concept to some of you, but we will show you how the aforementioned concept is applied in two options strategies.

Of course, there are risks and tradeoffs associated with options, but it’s a mistake to see any asset class as being non-risky.

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You can’t avoid risk in the financial world.
Even holding cash has risk.
Again, I will go over the risks associated with each type of trade that occurs in our options strategies. Because it is just important to understand your risk as it is your reward.
We are confident that once you learn how to properly use options, you will immediately find that options are the most powerful tool in the investment arena and are a necessity to outperforming the market.

Debunking Common Myths About Options Risk
The most common myth about options is that they’re risky. As I already explained, every investment is risky.

Your potential for loss in options doesn’t have to be any greater than your potential for loss in stocks or bonds or commodities.

The other big myth is that some options traders are able to vastly multiply their wealth in short order.

But the same rules apply here as well. If you make big bets on high risk-reward trades – yes, you can make lots of money very quickly. But the same can be said of penny stocks or the roulette wheel.

Options are vastly misunderstood and typically used improperly by inexperienced traders. Oftentimes, new options traders attempt to make inherently greedy decisions by choosing “pie in the sky” strategies rather than a methodical, steadfast approach. They ignore the fact that they are able to increase their chances of success by tenfold through the use of a highly leveraged strategy. They want the chance of striking gold, making the filthy rich trade, which is basically the same as buying a lottery ticket.

If you want lottery-like results, you should play the lottery.

Our approach is much different. We allow the statistics to work for us, not against us. We aim to hit singles and doubles with a high rate of success. Of course, from time to time a home run will occur, but this type of trade should be deemed as an anomaly.

Simply stated, we have the ability to create our own odds on each and every trade.

I hope you are not overwhelmed so far. We want to keep it as simple as possible because it is important to us that you understand exactly how we trade options.