Initial impressions on Options Trading
I recently started making more investments using Options, and wanted to share initial impressions on uses for Options Trading:
Reasons to Trade Options
- Lottery Tickets
- Don’t like the current price
Lottery Tickets
In reviewing advice from the world’s Top 99 Investors(1), a consistent rule is ‘you can’t time the markets.’
Now the best investors have made good timing or event-based calls, notably George Soros who correctly made a currency call that I believe netted $1B. However, this is not a core strategy of the best of the best.
It is healthy to view short-term options as lottery tickets, or a sports bet. You might get it right, but is it luck or skill? Who cares as long as you cash checks.
If you are opening up a short-term option, either a call or a put, you are not only betting on an event, but also the market’s knee-jerk reaction.
For example, let’s say on 11/28/20 you made the bet that Zoom (ZM) was going to beat its quarter and street consensus. That naturally would drive the stock higher, hence an out of the money call option.
Well, on 12/1/20, Zoom reported Results for Third Quarter Fiscal Year 2021 — adjusted earnings of 99 cents per share beating the Zacks Consensus Estimate by 32%. In response, the stock went down from $480 to $430.
