A question I get asked all the time is: why do you trade options and not forex, stocks, or futures? Why dedicate all your time and efforts to the options market? The simplest answer is that it’s where we found a way to make money. But I’m not going to leave it at that because that doesn’t really help you out. Let me break down why we found options to be a profitable space.
Key Takeaways
- Strategic Market Selection: Options trading offers a more manageable and profitable environment compared to highly liquid and competitive markets like Forex. In the options market, there are more opportunities to gain an edge over less informed traders and there is enough demand for options that we can come in on the supply side and command a lucrative price for providing liquidity.
- Specificity and Creativity: Options allow us to express very specific and unique views on volatility.This flexibility enables us to express specific market views and leverage sophisticated strategies not possible in other markets.
- A Clear Reason We Get Paid: The variance risk premium provides a solid foundation for profitability in options trading. It’s well researched and should continue to persist.
Choosing the Right Market is More Important Than Being The Best
When you’re playing a game involving chance, betting, or gambling, picking the right table to play at is crucial. The first reason we chose options is that it allows us to compete against market participants who we believe we can have an advantage over.
Imagine a professional poker player walks into a poker room and sees two tables. One table is filled with professional players and the other table is filled with a bunch of drunk dudes having fun on a bachelor party trip.
There is a seat available at both tables. If the goal is to make money, which table should they choose to pay with?
The answer should be clear. They should not play against other professionals who are equally skilled or better. They should want to play with a table at which they can have a direct advantage over their opponents. The most important thing in poker, if you ask a professional, is to pick the right table. You want to play against the drunk bachelors or someone who is there just to have fun.
Similarly, in trading, we want to be in a market where we have an edge over the participants. This is why we avoid the Forex market. Forex is the most liquid market in the world, with $7 trillion in daily transactions. The players attracted to this market are the best analysts, the biggest funds, essentially the smartest people in the world. Competing in that environment is incredibly challenging.
The Advantages of the Options Market
Instead, we found a smaller, more manageable market: options. The options market is much smaller than forex or the stock market. This smaller space means we encounter more retail traders who might be gambling with their money, or can directly engage with professionals looking to hedge their books. This creates opportunities for us to play against participants who are less informed or not directly looking to make money off the options themselves.
Finding an Edge
When you’ve picked a good table and know who you’re playing against, you can find an edge. An edge is what gives you a positive expected value, which is crucial for long-term success. With a positive expected value, all that’s left is to manage your risk properly and take every trade that fits your criteria. This sets you up for consistent profitability.
The Power of Options
Another reason options are so powerful for sophisticated traders is that they allow you to express very specific views on the market. If you can express the size of move, the timeframe for the move, the direction for the move. You can structure an option trade that expresses it perfectly and gives you the best payoff for being correct.
A Clear Reason We Get Paid
We previously wrote an entire blog about the importance of knowing why you get paid and treating your trading like a business. It’s probably the principle that we believe in the most. And this is the number one reason we picked options. Thanks to the variance risk premium, we have a very clear reason that we can get paid for selling options. It’s the foundation of every single strategy that we run.
Conclusion
So, why do we trade options? We trade options because we can find an edge, know who we’re playing against, and express specific market views. We’ve been trading options for five years, consistently beating the market, and raising capital. Now, we’re at a point where we can share our knowledge and strategies with you.
