The stock market is straightforward, in concept. Get the direction right and you profit, get the direction wrong, and you lose. If you buy a stock and it goes up you make money; if it goes down you lose money. If you short a stock and it goes down you make money; and if it goes up you lose money.
That’s stock market 101. Pretty basic, right?
But when you trade stock, you’re trading directionally. You’re speculating where the stock has to go to profit. The stock needs to move in the right direction, it needs to go up if you’re long, or down if you’re short, to profit.
However, what if you could profit simply from “where the stock doesn’t go?”
Every good trade plan has three basic components:
For bullish traders the entry is at demand, stop is below the demand zone, and profit target is the opposing supply zone. So when you enter a bullish trade, you’re hoping to not get stopped out before hitting the profit target.
What if instead of needing a stock to move up from a demand area to a supply area to profit, all you need the stock to do is not go down; just don’t get stopped out?
You don’t need the stock to go up; you just need it to not go down. If you don’t get stopped out, you profit!
How is this possible? Because, as per my opinion, Options are the greatest thing ever invented!
Once I learned how options work, and started to trade them back in the early 2000’s, I realized Newton’s law of motion could allow me to profit regardless of whether a bullish trade went up, or a bearish trade went down.
To quote Isaac Newton, and I paraphrase, “A body in motion will remain in motion.” Well, the Moses corollary to that would be: “A stock in a trend, will remain in a trend…until it doesn’t. And until it doesn’t, it does!”
In other words, you can profit based on where a stock doesn’t go. We can enter bullish trades at demand, and as long as the stock doesn’t break down below demand, the same demand zone we’re using to justify the bullish trade, we can profit.
There are numerous options strategies designed to take advantage of one of the attributes that make options unique among asset classes…Time Decay.
Options are the only asset class, where the price paid for the option consists of more than its intrinsic value. As options have expiration dates, we’re actually buying or selling not just the intrinsic value, but also the value of time until expiration. And the time value will decay as time marches on.
We don’t need the stock to move to profit. We simply need the calendar to move to profit.
This means that it’s possible for a stock to go absolutely nowhere, or to even be wrong directionally on a stock/options trade, and still be able to profit. Now I don’t mean really wrong; I don’t mean Enron wrong! However, it is possible to have a stock move against you directionally by MAYBE 5%, or even perhaps 10%, and still profit. This of course depends upon how out of money is your Option pick.
We can accomplish this be selling “out of the money” options, options with no real intrinsic value, only the time value. We’ll be collecting premium, and if the options expire out of the money, we’ll get to keep the premium.
If we sell out of the money put options, thus taking in premium, below a demand zone for a bullish trade, as long as the stock doesn’t go below the demand zone, the out of the money options will expire worthless at expiration, and we’ll keep the premium.
So as the stock is already over the demand zone, all the stock has to do is stay over the demand zone. It can go up, sideways, and even down a little, and still be over the demand zone, and the options will expire worthless, allowing us to keep the premium and profit.
Needless to say, being adept at identifying market turning points, and supply and demand zones are key to trading non directionally.
Is Options is the greatest thing ever invented? Here is why. If we enter a bullish trade and the stock goes down, we were wrong. However, while if the stock stays over the demand zone, we were right. We can be wrong and right, at the same time, in the same trade, and realize a profit.
Every option trade carries the risk of loss, up to and including 100% of the premium at risk, with some strategies having potentially unlimited risk. I advise you to understand, learn and practice enough prior to trading Options.
There is a lot more to learn about Options and number Strategies available to trade Options successfully. We encourage you to register for a Free Trading Workshop to learn a lot more. Click here to register now.