Options Lesson That Changed A Life

Netpicks is very fortunate to have Mike Rykse as our in-house options trading specialist. With over 20 years of trading options, Mike has learned a thing or two along the way.

But it wasn’t always smooth sailing as he made the same mistakes most retail traders do. The big one? Sticking with only using longs calls and puts for his trading. But that changed after a training event 5 years after he started with options, which changed his entire approach.

Learn From The Experienced

Mike was fortunate to attend a live training event in 2007 that was being held on the floor of the CBOE. Having access to those that were succeeding was an eye-opener as he learned he was making a common mistake that most retail traders make.

He was focused on strategies that required a directional move in the underlying. If the underlying was range bound, time decay would sneak up and along with increasing delta, potential profits were ripped away. If the trade didn’t make a big move fast or moved the other way, the losses would come.

What he learned changed his approach and the trajectory of his options trading career.

Enter Vertical Spreads

If you’ve been a frequent reader of our blog, you know vertical spreads are the bread-and-butter approach we use. Debit and credit spreads make up the handbook of strategies that our traders around the world focus on.

Using vertical spreads gave Mike better control of his risk, a higher probability of success, and 5 ways to profit with one trade. While puts and calls are good at times, they have just one way for you to profit.

Vertical spreads are so important, that Mike has spent years trying to teach retail traders how vital this one approach can be. Even if these don’t make up the bulk of their trades, he believes they should be a part of your approach.

Our Toolbox Of Option Strategies

Thanks to Mike, we keep things very simple with our approach to options and there are approaches to use for all types of traders.

Long calls and puts work well if you have a conviction on a directional play. While they carry great profit potential, they are also high-risk and only give you one way of making money

Take a look at using debit spreads. These can lower your trading costs 30-50% but also have limited upside potential.

Extremely Conservative?
Using credit spreads offers five ways of making money, the lowest risk and the highest probability of success. Those benefits come with a cost and that cost is having the lowest reward.

Don’t just pick one. Use all three for a robust way of handling your options trading.

Credit Spread VS Debit Spread

Our conservative trade is the debit spread and involves buying a higher premium options ( you pay premium) and sell a lower premium option (you receive premium) of the same underlying.  Since you are paying out more than you receive back in premium, this is a debit to your account.

The extremely conservative approach is a credit spread where you sell the higher premium contract (you receive the premium) and then buy the lower premium one.

Don’t Be Perfect

Everyone wants to be right in trading but you can only be right when it comes to implementing your trading plan consistently. The trade will work out or it won’t.

Using credit spreads, we don’t need to be right or to have perfection occur for us to make money. When you sell a credit spread to open a trade, time decay work in your favor.  Every day that passes, we will make money as time decay adds up. We don’t need a huge move as we would with straight calls and puts.

Too Advanced?

Options can be overwhelming at first especially when you start talking about The Greeks. A lot to learn and too risky is a common belief. Truth is, these are safer than buying calls and puts.

You can put on a trade with less cost than other strategies. Being cheaper will open the door for you to trade a bigger basket of stocks and ETFs.

Vertical Spreads Wrap Up

Options can be overwhelming at first, but vertical spreads are a great way to simplify things. Over the long term, you will find that vertical spreads offer better control of risk and a higher probability of success than other option strategies.

If looking for a highly conservative options strategy, consider trading credit spreads. With lower risk and higher chances of success, they will appeal to many traders.

Finally, don’t just pick one options strategy – use a variety of strategies for a robust approach to options trading.

Trade The High Performers – Which Ones?

NetPicks has the answer with our dynamic duo of ETF’s – SPY and QQQ. These two markets are among the most liquid with good volume and open interest in their options. They also offer unique opportunities each week with three different expiration cycles.

Trading options can seem daunting, but with our help it can be easy and profitable. We’ll show you how to take advantage of this Dynamic Duo for maximum gain.

Click to download your free guide to see for yourself why we call these our Dynamic Duo for options traders.

Author: CoachShane
Shane his trading journey in 2005, became a Netpicks customer in 2008 needing structure in his trading approach. His focus is on the technical side of trading filtering in a macro overview and credits a handful of traders that have heavily influenced his relaxed approach to trading. Shane started day trading Forex but has since transitioned to a swing/position focus in most markets including commodities and futures. This has allowed less time in front of the computer without an adverse affect on returns.