Why I Use Options to Invest and Why You Should Too

By January 8, 2018 January 10th, 2019 No Comments

What I love about the way I invest is that even when my opinions are wrong, I can still make money for my clients and myself. Most investors cannot even imagine doing that. I can make money when I am wrong because I use options strategies to invest.

If you go back and look at all my TV interviews in 2017, you will see that I was 100% wrong about the overall stock market, the S&P 500, the NASDAQ 100, and of course volatility. I was calling for a 10% to 15% correction during 2017, not a market crash like a lot of the alarmists. My predictions were based mostly on how far we have come since the 2016 election. In 2017, I tried twice to call the top of the NASDAQ. I might even have said being in cash was not bad if you were not in the market already. Most importantly, I still made money for my clients by using options.

Whenever I tell this to investors who are unfamiliar with options, I get the same reaction. Their eyes roll back into their heads, and they say options are too complicated. They insist that you need to be good at math. Options are confusing with all those funny names they use for the strategies. I get it.

Options seem foreign and confusing at first glance, but my response is quite simple. If you can drive a car, you can invest using options. It is like any other skill you want to learn. You need to do it over and over to become good at it. Repetition is key. What is foreign to you can become familiar with enough practice.

People are scared to use options for many reasons. Investors are afraid that they will lose all their money because many people tell them that options trading is risky. Keep in mind that people who say that to you have limited knowledge of options strategies! I have also found that the people who consistently lose money with options are using them the wrong way.

Since I started using options over 13 years ago, my returns have become unbelievably consistent. I have been trading and investing for close to 22 years. I have done it all. I have used momentum investing strategies, day trading tactics, technical analysis, fundamental analysis, factor modeling, seasonality, quantitative analysis, and many combinations of them. None of these techniques could give me the consistency that options have. There are many reasons for the consistently high performance of successful options strategies.

First, I can be wrong about the direction and still make money! How amazing is that? I do not care who you are, guessing the market trend is tough! I was so wrong about the direction of the market in 2017, but I was still able to make money. The great thing about options is that none of that matters.

Second, I no longer need to have an opinion. You can do as much research as you like, but no one can be sure which direction a stock, commodity, or an index is going to go. With options, I can use probabilities and statistics to make my investment decisions. This gives me my edge. The best part is that I know what the odds are that my investment will make me money. Now, I know what you are thinking. The world changes and statistics work until they stop working. What is the alternative? The odds against a highly unlikely black swan event are, by definition, more than 100 to 1. When improbable events occur, options give you ways to protect yourself.

Third, I can define my risk with options. How cool is that? If I can only afford to lose $1,000, I can use an options strategy that limits my losses to exactly $1,000. Being able to quantify investment decisions leads to consistency. Often, you do not have the time to make up for a substantial loss. With options, time can be your ally.

Fourth, time is on my side when I am selling options because the value of an option decays over time. This one is my favorite strategy. The fact that I can take a position and get paid every day to keep it is a game changer. Anyone who tells you that option selling is too risky knows nothing about options.

Lastly, I can reduce my cost basis. The fact that you can consistently lower the costs of your current positions is another way to increase your probability of profit. A think tank in Chicago did a study that showed that if you ran a covered call strategy on the ETF SPY over the past 12 years, you would have outperformed the S&P 500 index and experienced lower volatility. When people tell you that it is impossible for active investors to beat the S&P 500 index, they are telling you that they have not been keeping up with the latest research.

If you have been avoiding using options, you are doing yourself an injustice. By adding options strategies, you will increase your returns and consistency. If you start small and keep it simple, you will soon be wondering why you were not investing in options all along.