Real options trading
There were stories of traders risking too much and losing everything, and traders retiring by the age of 25 having made their fortune through skill or luck.
Another great story came from my old trading company. Learn More One day, my boss and another trader got into a fistfight in the middle of the trading crowd.
Options trading is a lot different from trading stocks or mutual funds, but it can come with some real advantages for investors. But what is options trading?
The fight deteriorated to the point that these two year-old men were rolling on the ground wrestling. The story goes that my boss was in trouble as the other man had pinned him down and was repeatedly punching him in the face.
Clearly the trading floor is not for the faint of heart. Others, like Pete, a trader who worked at my company, make their money quietly.
Pete traded in the Enron trading pit. For years, Pete made good money simply trading Enron in a conservative manner.
5 options trading strategies for beginners
However, once the cracks started forming in the Enron story, Pete used the leverage of options to build a massive bearish position. In fact, he slowly made money trading it conservatively until the stock neared 35 in September The stock collapsed in the proceeding weeks, trading at around 10 by early November In real options trading, our boss begged Pete to lock in his big score and get long.
But Pete kept his short position, and continued to aggressively buy 10 and 5 strike puts. Battling Yourself Trading stocks and options is a great psychological battle with ourselves.
With traditional investing you can only make money when stocks go up, but options trading can potentially help you to never suffer a major loss in your portfolio ever again. A quick recap from the previous lessons Stock option contracts grant you the "right", but not the "obligation", to buy or sell shares of a stock at a "set price" on or before a give "date" time period.
Far too often, we sell winners too soon and let losers run too far. Just think about how great it feels to lock in a profit and get that instant gratification—yet these are the trades we should be letting run as far as possible.
Even with all of my trading experience, I still fight against myself. If so, step back and rethink your trading plan … and maybe even think back to the story real options trading Pete, and the greatest options trade I ever saw. Share below.
He uses calls, puts and covered calls to guide investors to quick profits while always controlling risk. Post navigation Free Report: How to Hedge Portfolios with Options Once considered a niche segment of the investing world, options trading has now gone mainstream.