Exposure<\/strong><\/h2>\n\n\n\nAs children, we are exposed to countless new experiences, and our world expands exponentially. Curiosity kicks in. Young people face \u201cchallenges\u201d with a unique mindset. In fact, children don\u2019t often view these situations as challenges. They see opportunities to learn and have fun.<\/p>\n\n\n\n
To advance your use of options, it may be best to take an adolescent approach.<\/p>\n\n\n\n
Perhaps you\u2019ve been exposed to equity or index options over the past few years. A typical starting point is buying a call (or put) and, ideally, learning by evaluating how that option performs. We need a feedback mechanism in place. The evaluation is imperative. In my estimation, that\u2019s the difference between how\/why children learn and how adults often fail to advance their understanding.<\/p>\n\n\n\n
Foundations Are Key<\/strong><\/h2>\n\n\n\nSometimes, early success using options can be a curse. Allow me to explain. In capital markets, people tend to \u201ckeep score\u201d based on profit and loss, which makes a lot of sense. We associate profits with progress, but that\u2019s not always the case.<\/p>\n\n\n\n
I\u2019ve heard countless stories about new option users buying\/selling options (insert any strategy), making money and conflating their profits with understanding. Often, they will then start trading in a bigger size. If they originally traded 1 contract, then they start trading 2 or 3 lots. If they began trading 5 lots, maybe then they would trade 10.<\/p>\n\n\n\n
The problem is they likely haven\u2019t received feedback on how\/why the option strategy worked.<\/p>\n\n\n\n
Absent an understanding of why the 1-lot or 5-lot trade made money \u2013 this approach is bound to fail. It\u2019s akin to adding a second floor to a ranch home without testing the soil or foundation to see if the weight can be supported.<\/p>\n\n\n\n
Progress Not Perfection<\/strong><\/h2>\n\n\n\nP&L doesn\u2019t tell the whole story because options, like life, are complex. Elevating your comfort level with complex products takes time and refinement. You need to understand why <\/em>you made (or lost) money. Was it purely a function of underlying price (directional exposure)? Was there profit attributable to a tick up (or down) in implied volatility levels? Did you manage to scalp gamma (realized vol > implied)?<\/p>\n\n\n\nDid you just get lucky? It happens.<\/p>\n\n\n\n
This type of analysis is how you give yourself the feedback that we get more frequently as children.<\/p>\n\n\n\n
Options to Achieve an Outcome<\/strong><\/h2>\n\n\n\nAnother way to develop depth with your options knowledge is to employ a strategy with a very specific objective. Generally, that will involve a spread trade (vertical or calendar) or perhaps using an option in conjunction with an underlying security (buy write\/put write).<\/p>\n\n\n\n
Sticking with the sports theme here (MLB opening day is weeks away), it\u2019s shifting from individual to team workouts. Longer-term success in sports or capital markets involves an understanding of how the parts work toward a common goal.<\/p>\n\n\n\n
In 1970, Bob Gibson had a 23-7 record for the 1970 St. Louis Cardinals. He had a great year and won the National League Cy Young award (best pitcher). However, the team went 76-86 and ended the season in 4th<\/sup> place, well behind the Pittsburgh Pirates.<\/p>\n\n\n\nThat\u2019s like having a great trade but not accounting for either other (market) positions that are mediocre or bad. The math doesn\u2019t add up.<\/p>\n\n\n\n
Consult the Architect<\/strong><\/h2>\n\n\n\nAn architect helps their clients understand the risks, rewards and costs associated with construction. Nasdaq offers an \u201cOptions Architect<\/a>\u201d to help active and prospective market participants understand the hypothetical performance of various strategies over a specific time frame. There\u2019s no hourly rate to employ Nasdaq\u2019s Options Architect \u2013 so consider doing so before you continue your portfolio construction!<\/p>\n\n\n\n![\"different](\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\")
<\/figure>\n\n\n\nSource: NASDAQ<\/p>\n\n\n\n
Keep Building<\/strong><\/h2>\n\n\n\n
Sometimes, early success using options can be a curse. Allow me to explain. In capital markets, people tend to \u201ckeep score\u201d based on profit and loss, which makes a lot of sense. We associate profits with progress, but that\u2019s not always the case.<\/p>\n\n\n\n
I\u2019ve heard countless stories about new option users buying\/selling options (insert any strategy), making money and conflating their profits with understanding. Often, they will then start trading in a bigger size. If they originally traded 1 contract, then they start trading 2 or 3 lots. If they began trading 5 lots, maybe then they would trade 10.<\/p>\n\n\n\n
The problem is they likely haven\u2019t received feedback on how\/why the option strategy worked.<\/p>\n\n\n\n
Absent an understanding of why the 1-lot or 5-lot trade made money \u2013 this approach is bound to fail. It\u2019s akin to adding a second floor to a ranch home without testing the soil or foundation to see if the weight can be supported.<\/p>\n\n\n\n
Progress Not Perfection<\/strong><\/h2>\n\n\n\nP&L doesn\u2019t tell the whole story because options, like life, are complex. Elevating your comfort level with complex products takes time and refinement. You need to understand why <\/em>you made (or lost) money. Was it purely a function of underlying price (directional exposure)? Was there profit attributable to a tick up (or down) in implied volatility levels? Did you manage to scalp gamma (realized vol > implied)?<\/p>\n\n\n\nDid you just get lucky? It happens.<\/p>\n\n\n\n
This type of analysis is how you give yourself the feedback that we get more frequently as children.<\/p>\n\n\n\n
Options to Achieve an Outcome<\/strong><\/h2>\n\n\n\nAnother way to develop depth with your options knowledge is to employ a strategy with a very specific objective. Generally, that will involve a spread trade (vertical or calendar) or perhaps using an option in conjunction with an underlying security (buy write\/put write).<\/p>\n\n\n\n
Sticking with the sports theme here (MLB opening day is weeks away), it\u2019s shifting from individual to team workouts. Longer-term success in sports or capital markets involves an understanding of how the parts work toward a common goal.<\/p>\n\n\n\n
In 1970, Bob Gibson had a 23-7 record for the 1970 St. Louis Cardinals. He had a great year and won the National League Cy Young award (best pitcher). However, the team went 76-86 and ended the season in 4th<\/sup> place, well behind the Pittsburgh Pirates.<\/p>\n\n\n\nThat\u2019s like having a great trade but not accounting for either other (market) positions that are mediocre or bad. The math doesn\u2019t add up.<\/p>\n\n\n\n
Consult the Architect<\/strong><\/h2>\n\n\n\nAn architect helps their clients understand the risks, rewards and costs associated with construction. Nasdaq offers an \u201cOptions Architect<\/a>\u201d to help active and prospective market participants understand the hypothetical performance of various strategies over a specific time frame. There\u2019s no hourly rate to employ Nasdaq\u2019s Options Architect \u2013 so consider doing so before you continue your portfolio construction!<\/p>\n\n\n\n<\/figure>\n\n\n\nSource: NASDAQ<\/p>\n\n\n\n
Keep Building<\/strong><\/h2>\n\n\n\n
Did you just get lucky? It happens.<\/p>\n\n\n\n
This type of analysis is how you give yourself the feedback that we get more frequently as children.<\/p>\n\n\n\n
Options to Achieve an Outcome<\/strong><\/h2>\n\n\n\nAnother way to develop depth with your options knowledge is to employ a strategy with a very specific objective. Generally, that will involve a spread trade (vertical or calendar) or perhaps using an option in conjunction with an underlying security (buy write\/put write).<\/p>\n\n\n\n
Sticking with the sports theme here (MLB opening day is weeks away), it\u2019s shifting from individual to team workouts. Longer-term success in sports or capital markets involves an understanding of how the parts work toward a common goal.<\/p>\n\n\n\n
In 1970, Bob Gibson had a 23-7 record for the 1970 St. Louis Cardinals. He had a great year and won the National League Cy Young award (best pitcher). However, the team went 76-86 and ended the season in 4th<\/sup> place, well behind the Pittsburgh Pirates.<\/p>\n\n\n\nThat\u2019s like having a great trade but not accounting for either other (market) positions that are mediocre or bad. The math doesn\u2019t add up.<\/p>\n\n\n\n
Consult the Architect<\/strong><\/h2>\n\n\n\nAn architect helps their clients understand the risks, rewards and costs associated with construction. Nasdaq offers an \u201cOptions Architect<\/a>\u201d to help active and prospective market participants understand the hypothetical performance of various strategies over a specific time frame. There\u2019s no hourly rate to employ Nasdaq\u2019s Options Architect \u2013 so consider doing so before you continue your portfolio construction!<\/p>\n\n\n\n<\/figure>\n\n\n\nSource: NASDAQ<\/p>\n\n\n\n
Keep Building<\/strong><\/h2>\n\n\n\n
That\u2019s like having a great trade but not accounting for either other (market) positions that are mediocre or bad. The math doesn\u2019t add up.<\/p>\n\n\n\n
Consult the Architect<\/strong><\/h2>\n\n\n\nAn architect helps their clients understand the risks, rewards and costs associated with construction. Nasdaq offers an \u201cOptions Architect<\/a>\u201d to help active and prospective market participants understand the hypothetical performance of various strategies over a specific time frame. There\u2019s no hourly rate to employ Nasdaq\u2019s Options Architect \u2013 so consider doing so before you continue your portfolio construction!<\/p>\n\n\n\n<\/figure>\n\n\n\nSource: NASDAQ<\/p>\n\n\n\n
Keep Building<\/strong><\/h2>\n\n\n\n
![\"different](\"\/campus\/wp-content\/uploads\/sites\/2\/2023\/04\/Picture1.png\")
<\/figure>\n\n\n\nSource: NASDAQ<\/p>\n\n\n\n