Options, Jim, But Not As We Know Them
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Opposite Day, Again
by Alex King, Cestrian Capital Research CEO.
I hate options.
Over time I have made money and lost money with options, on balance made money, but until I wised up it was usually a fraught experience either which way.
There are three reasons why I hate options.
One, because you have to be right on the x-axis as well as the y-axis. Technical analysis can help you on the y-axis and if you get good at it then you can call price action right more than wrong. We have our share of shooting-ourselves-in-the-foot here at Cestrian but generally speaking we do pretty good on the y-axis. The problem is that the methods we use to guess - sorry, not guess - rationally analyze and calculate - where stock A or ETF B might end up on the y-axis, which is to say Elliott Waves, Fibonacci levels, and a spoonful of Wyckoff, are no use whatsoever on the x-axis. None. Well, that’s fine if you own common stocks or ETFs, but it’s not fine if you are messing about with options. You need plenty of margin for error on the x-axis if options are your poison.
Two, because the price action of the underlying stock or ETF is only one of many inputs into the price action of any particular option arising from the underlying. You know this, because the sheer number of Greeks tells you this. Drawing a line on a stock chart is to calculating future option prices as measuring R&D as a % of sales is to working out what the stock price will be after the next earnings print. It’s one input, for sure, but it is of merely passing importance.
And three, because when wrong in a simple options trade - and because of points One and Two above, one is bound to be wrong quite a lot - there’s not a great deal you can do about it. Averaging down or up isn’t in and of itself all that wise unless you have properly assessed said Greeks; the sheer possibility of total loss means putting good money after bad can have limited appeal. Hedge? By the time the option trade has gone against you - and it can do so quickly - it’s too late to hedge, most likely. Wait it out? These things expire, dammit - patience can be a wonderful risk management factor when it comes to common stocks or ETFs, but options? You don’t need to Google ‘theta crush’ if it has happened to you even once.
Chad.
Now the above is a plain and simple result of Doing Options Wrong. You see, I have bought and then sold puts and calls and whatnots, attempted to defer that theta thingummy by buying LEAPs aka expiries way out in time, and again, overall it has been OK. I have meddled with directionless straddles and strangles too. But in general in options I have rolled a lot like Chad, whereas in other aspects of our work at Cestrian we most certainly roll like Big Money.
Big Money.
Then an epiphany came along, and its name was Jay Urbain, Ph.D. A computer scientist by background, Jay started posting options analysis with us a while back. Over time he has refined his method to include analysis of how the options market drags the equities market around, particular at periods of options-induced high stress (monthly and quarterly options expiry dates for instance); and into calculating the likely short-term rangebound moves of underlying stocks and seeing how that can be exploited by taking options positions in a risk-controlled manner ie. being on both sides of the trade, directionless with profit potential. And this is how Big Money plays options. Big Money will tell you that unless you can drive the price of the underlying, you probably want to be using options to collect premium from Chad, not to chase style capital gains from the market. Big Money will tell you to let Chad gamble with his Mom’s money which in the main involves forking Mom’s money over to Big Money. Which is why Big Money stays Big Money and why neither Chad nor his too-indulgent Mom can have nice things.
Jay’s Options.
It is with great delight therefore that I can announce the latest service on our Cestrian Stocks Symposium platform - this is the place where we seek out analysts of uncanny quality and make their work available to all - and that is, Jay’s Options. The name of the service is simple. The trade ideas in the service are simple. But the underlying analysis of profit potential and the risk management methods built into every idea truly reflect that Ph.D status.
We invite you to join Jay’s Options at a special launch price of just $496/yr. If you trade options? You probably lose that much money on any given Wednesday lunchtime. So we think investing the price of ten trips to Starbucks to get lattes for a few co-workers can be a sound decision for your financial future.
That price is available until 12 February, wherein the rack rate of $796/yr applies.
The good news is that if you join at launch pricing, you keep launch pricing for as long as you stay a member.
You can learn more - and when I say learn more, I mean really learn more - here.
Alex King, Cestrian Capital Research, Inc - 12 January 2024.