All right, baby, let’s rock and roll. You’re rock stars. You almost be in Cleveland at the Rock and Roll Hall of Fame. You’re such rock stars. So today and tomorrow I want to talk a little bit about tactical stuff, although I’m not going to show charts. I can do that eventually in the future, but I mean, let’s face it, watching some jack ass go over charts such a snooze. I know you know that inherently you think you like it, but you really don’t. So someone talked about, can you talk about your options trading? Again, what I do, I don’t know how it would be relevant for you.
When I look at options trades, so let’s say that you’re bullish on something. What is it that you’re supposed to look at? Some of you probably first thing you look at is the premium. How much is the premium? Because your account balance is only a certain size, so can you afford it? Right? How much of your capital you going to put to work do you take say one half of 1%. Say you have a hundred K, you have $500 as one half of 1%. Do you try to buy as many contracts as you can within that $500 number and then let the thing go to zero? Or do you put say 2% of your capital, buy $2,000 worth of options, as many contracts as $2,000 would allow you to buy and then risk 75% of that, I mean one fourth of that, 25% being the $500.
That’s all a field play. You’re only going to know the math works out the same, which is better. You’re only going to know by doing it. Just like I said in so many other things too. If you look at how options are priced, the lower strike prices go in the money first obviously. So therefore you have to look at delta may be gamma. You can go to town on the Greeks, but typically what happens is when you look to see what options you can afford, I don’t like using cheap and expensive and what you can afford, but if you look at something that’s in the money, those are going to have higher premium. You have intrinsic value.
So then you look at something that’s maybe out of the money, those are going to have smaller deltas. So for what you can anticipate, I particularly don’t use price targets. Maybe you do. You have to figure for if you buy an at the money option that has say a delta of 50 for every dollar move, right? The theory is that the option price is only going to move 50 cents. Then what’s the spread? So what’s your holding period? How can you avoid or not neutralize, but how can you minimize to the best of your ability, the decay part? So all of that becomes a function of what it is that you’re able to tolerate based on your account. And to me, I’ve seen people do it so many different ways that I can’t say that there’s one best way.
I typically don’t buy things that are way out of the money and look for these fantastic situations to come up and to endow me. I might’ve done that once thinking I had the inside line on a company 35 years ago, and if the thing moved 20%, all these options that were very cheap, low price, I don’t want to say cheap again because cheap speaks to value. You buy a bunch of low priced options and then have the thing surge. Maybe there’s a takeover candidate. Maybe there’s people do this around earning surprises. They want a big payday. To me, that’s a real gamble because you really don’t know what the odds are. Odds are probabilities, and so then you don’t really know how to handicap the trade or figure out the bet size. You could have always just pick a number, but you need to figure out for the risk that you’re willing to take, what kind of rate of return that you want to make both on the trade and then what is that going to do to move the needle of your account balance? So the first thing to look at then is what can you afford from an option premium standpoint? And then if you look at the delta, how much do you think you want to participate? It’s not always an exact science, but it’s pretty reliable. So if something moves $10, right? Because the delta of any underlying security is one.
So if you’re looking at doing options, you know that you’re not going to participate a hundred percent in that move, even though the derivative is based on the underlying that is actually making the move. Why wouldn’t you just own the underlying? Is it the leverage? Can you figure out based on the number of shares you could afford to buy with a delta of one versus the number of contracts, right? What’s your rule of thumb? Because again, I’ve seen it if I have 20 people who are really good at options trading, there’s 20 different ways they position size. I gave you one at the top of the show. Do you invest more money into taking on more contracts and risk 25% of your two K, or do you just buy the 500 and say if it goes to zero, I know my max loss.
Sometimes the underlying can move so sharply that the option prices get smashed and there’s not an opportunity for you to get out at where you would have your stop, nevermind the bid ask spread. So I don’t know that there’s an exact science on how to do that other than to go and experiment with what you think is best for you. I have mixed emotions about stuff, but I’ve really learned to kind of culture my own system around it over the years, over long periods of time. There was a time when I used them as a surrogate because I was looking at shares that if I bought as much as I needed from an outright standpoint,
It would tie up a lot of buying power, you see? And so I used the options, not leaps, but I used the options as a surrogate to have the exposure. So you might consider the same thing, but again, if you’re doing it because your account is small, I’d say save your money and contribute to your account from your savings and build up your corpus pros. Typically like the leverage and the loss limiting aspect of it too. Oftentimes you can find something, you can create spreads, you can get very creative, excuse me, with options because you can buy and sell different expirations and different strike prices against, but spread trading is a whole other beast, so I don’t want to get into that and spread trading in options is very different from spread trading in futures kind of cover that in the mastermind because it’s just too much to do here and I don’t feel like doing three hour videos for free, so you can go study that on your own and figure out, but I would definitely look at how do you want to manage the risk?
Do you want to put more money to work and then have a protective stop where you would offset the options trade and retain some of that money? Right? In the example at the top of the show, I talked about investing as much as say 2% of a hundred thousand dollars account. Not looking for that to go to zero I, but risking only one fourth of that position, $500, which would be one half or 1% of the overall account. You’d have to figure out if that’s a good fit for you or would that make you nervous having that much exposure knowing that if the name tanked because of earnings or because of whatever, you might not be able to get out, you might take a thousand dollars hit. Would that be okay? How do you know it’s hopefully hard to back test with options? Or are you better off just buying whatever it is your R and just putting that amount to work and if it goes to zero, it can’t get any worse. That only comes from trial and error. It’s the only way to do it.
I know some options guys who are really good and so I’m just thinking about actually for this thing, maybe have them on as guests and do a deeper dive in getting their insight. I’ll see about doing that. They’re easy enough. I don’t want to put the message out there. Then you have every jackass sending, you’re like, so-and-so is an expert and has these strong opinions and they’d love to help your audience this way and that way, and I’m not interested. That’s why I feel, look at the contact page. It says very clearly, I’m not interested in interviewing people.
It’s not that kind of show. I do have friends, people that I’ve known for 20 years. It’s a different type of guest. They’re not strangers to me. We’re friends. They’re pros. They have a long track record, so they also have my trust if I was affiliate sales or if I had some other type of marketing thing or I did like there’s some podcast, there’s the guy from Australia, I think you got to pay to be on that show. That’s a different business model right here. I fund everything. I do this all largely myself. I pay for some post production. I’m trying to work better on getting thumbnails that actually mean something to you. So it’s evolving, but I largely do it myself and I’d get a lot of help obviously from ganja. So that’s going to evolve. So maybe I’ll have some guests on the way.
I had Brian Shannon on for example. It wasn’t just like a random, Hey, I know you’ve watched your show. I have all your books. I really like your message. Would you please consider? That’s not the kind of outreach that I do. I can call my friends who are all kind of branded brand names. They’re all excellent people, and so I can do that in the option space. Maybe I’ll reach out and I’ll do something along those lines for you, but I’m hesitant to turn this into an interview style show. I’ll rethink it. I’ll have all of December to meditate on that, but it would have to kind of be conjugated with all the spiritual stuff, the emotional intelligence, the traitor psychology. Otherwise, we get more of these people talking about the economy, and you can get a bunch of that for free on tv. I don’t need to do that.
It’s kind of a gigantic snooze to be frank, because no matter what’s going on in the world, no matter what’s going on in the economy, if you’re doing enough research, you should be able to find four or five names a year that meet your criteria, and that’s really all you need. You see? You don’t need to find something every day. You just need to catch what are the biggest moves and be there options can certainly help you do that because of the loss limiting methodology that’s built in, especially if you have debits, right? We’re talking about if you have a debit balance or a net debit balance in the case that you’re doing bull call spreads or bare put spreads, just to keep it super simple. There’s all kinds of broken wind strategies. Don’t want to get into it and go from there. But anyway, those are some things to ponder. We’ll go from there. Maybe I’ll have a guest on whatever. Thanks for being here, and I will see you tomorrow with another episode where we’re going to talk about how do you handle taking profits. It’s an interesting concept. Thanks for being here, folks. I’ll see you tomorrow.
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