SPECULATIVE OPTION STRATEGIES

As mentioned in a prior article, the OPTION STRATEGIST has several choices when it comes to determining which way to participate in the OPTIONs MARKET.  Many will enter into a pure SPECULATIVE STRATEGY based on an opinion or observation.  Keep in mind that there are many different levels of speculation and the strategy that is applied will determine the probability of success along with the level of risk and any edge that might be obtained. 

In most cases, when a trader has an opinion that an underlying stock or index will rise, they will simply purchase CALL OPTIONs.  If they feel an underlying will drop in price they will buy PUT OPTIONs.  This type of strategy would be an example of pure speculation since the OPTION TRADER is banking on being correct by purchasing CALL or PUT OPTIONS while needing the underlying to move in the direction anticipated.  There is no edge gained by the trader in this case as the CALL or PUT POSITION will rise and fall based on the direction of the underlying.  Not only will this speculative strategy need to be correct in its market direction forecast, it will also need to overcome the TIME DECAY that will lower the value of the OPTIONs owned.  The TRADER can be correct about ABC rising but that still don’t guarantee a successful OPTION TRADE.  If ABC were trading at say $50 and the AT THE MONEY CALLS (strike price of 50) were bought for a PREMIUM of 6.00 with three weeks left until EXPIRATION, ABC can rise 4 points up to $54 at expiration and even though the trader was correct about ABC rising, the SPECULATIVE OPTION STRATEGY that was put on would still be a loser. 

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Even if a variation is made on this trade and the trader lowers the risk by selling the 55 CALLS and turns this into a VERTICAL SPREAD this would still be considered a SPECULATIVE OPTION STRATEGY since the trader is still banking on ABC to rise and the strategy would still need ABC to rise for it to become profitable.  Even if the trader were BEARISH on ABC and took the opposite position on the VERTICAL SPREAD, the strategy is still considered highly speculative because the position is committed to an opinion and will rely on ABC dropping in price for it to become profitable. 

As you can probably tell, the point here is that before we get into the INCOME STRATEGIES we must first determine the basis of the SPECULATIVE OPTION STRATEGIES and what they offer.  It should be understood that whether they offer little or no edge at all, they are still based on an observation or opinion.  The trader must be correct in their opinion for SPECULATIVE STRATEGIES to be successful.  For those who are capable of predicting future events or have a crystal ball, you have no need for gaining an EDGE.  The would be no reason for learning about the higher PROBABILITIES OF SUCCESS that we will cover when we get into INCOME OPTION STRATEGIES. 

In my next article we will break into the mechanics of the INCOME OPTION STRATEGIES and how they eliminate being sensitive to the guessing and opinion that is made up in the SPECULATION OPTION STRATEGIES we touched on today.  The idea here is to eliminate prediction and the need to guess market direction.  Of course OBSERVATIONS are still needed but the plan is to use those observations and tie them to OPTION STRATEGIES that will provide a better edge and will offer higher probabilities of PROFIT while maintaining a neutral bias. 

Happy Trading

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