Market Insights: Why I Trade Options [Part 1]

Welcome back dear reader! Last week, I took a look at this chart pattern on the S&P 500:

I talked about pattern recognition, and how the S&P 500 had continually bounced off of its 50-day moving average. Now that it had pulled back to the 50-day moving average again, it seemed like a great buying opportunity. I also said that this was no guarantee that the market would bounce back, just that the pattern was that the market always had. In fact, I was comfortable enough with this probability that I even initiated a trade on SPY based on this pattern.

Then this happened:

Now, I still standby what I said. The S&P 500 does usually bounce off of its 50-day moving average, and it’s likely to continue that pattern in the future. Just because the pattern didn’t hold this time, due to exogenous factors such as the Evergrande meltdown and market fears about the upcoming Fed meeting, doesn’t mean that the pattern is invalid. In fact, if I had the chance to go back to last week knowing what I know now, I’d still place the same trade.

Why? Because I didn’t just buy SPY shares. I traded an options strategy called a “Calendar Spread”. A Calendar Spread is designed to make money no matter what direction the underlying security does. So even though the market tanked over the weekend, I’m actually set to make $0.67 per share this week.

If the market goes up a lot, I have the opportunity to make a lot more money, possibly even $5.00 per share or more. But even if the market keeps dropping, I’ll make $0.67 per share no matter what. This situation just helps to illustrate why choosing the right vehicle for your trading and investing is so important.

Imagine that you are going on a long family road trip and you have two vehicles to choose from: an Indy 500 race car or a roomy minivan. Of course, you would choose the minivan. Even if the race car is sexier and faster, it’s the wrong vehicle for your trip. It won’t fit your family, and even for a single person, it would be extremely uncomfortable to be stuck inside for long periods of time. But if you were trying to win a race, then of course the race car is an obvious choice over the minivan.

It all depends on what your goals are and when it comes to my financial life, my goal is to consistently and reliably grow my wealth over time. I’m not looking to be a world-class trader or make eye-popping returns, and I’m certainly not looking to risk my wealth on wild gambles.

Instead, I look for opportunities and trade structures that will let me grow my wealth at a regular rate over time. I know that the market will go up sometimes, and other times it will go down. But I want to be able to make money no matter what it does. And that’s why options are the vehicle that I’ve chosen for my financial journey.

If I had just bought SPY shares last week, I’d be hurting pretty bad this week. But because I traded options instead, I’m growing my wealth steadily every week, whether the market goes up or down.

I know it’s super cheesy but I always like to say that “options give you options”, because it’s true! When you trade options, you have so many more choices available to you than if you trade stocks. Instead of a binary outcome (“I make money if the stock goes up” or “I lose money if the stock goes down”), I can structure trades that actually pay me no matter what the stock does. It’s a very powerful way to trade.

There’s a very good reason why options trading has absolutely exploded in popularity recently. Traders and investors alike are discovering the power that options can bring to their financial journey. It never hurts to have another tool in your toolbox.

As always, it is critical to follow a solid trading plan no matter what vehicle you choose for your journey. Conducting proper analysis, structuring your trades for asymmetric returns, and managing your risk wisely will all make huge differences with any asset class. So decide what vehicle is right for your journey. If you want to learn more about what options can do for your portfolio, stay tuned as we dive into Part 2 next week!