I Changed My Mind About Options. Here’s Why.

Are you an options trader?  

If so, my feathered friend has a warning for you.

This wobbly turkey is hatched on a farm on a perfect sunny morning.

It’s fed every day, kept safe and secure from the elements by the friendly farmer.

This turkey lives a good, predictable life.

That is until one day…

More...

WHACK!

Off with his head!

From the life experience of the turkey, this abrupt end to life couldn't be predicted.

But if this turkey could see historical charts of other turkey's lifespans, he would start tunneling out Great Escape style pronto!

turkey trading surprise

Here's a real life example that's disturbingly uncanny:

Credit Suisse’s ETF, XIV, went up 1370% in 6 years…and then imploded to basically zero in a day (-93%).

Looking at this ETF you would never know that it was a ticking time bomb, ready to blow your portfolios to smithereens.

Like this poor sucker.  Ouch!

xiv implosion

But a decent simulation would have flushed out the fact that a rapid rise in the VIX would wipe out these funds.

You can actually model the "real" VIX with this simple equation that I wrote about there.

Be Wary of Poor Liquidity

Like XIV, highly leveraged trading products, and especially options, have poor liquidity (the volume of shares or contracts traded back and forth).

If everyone tries to get out at once, these instruments can completely decouple from the root index they are supposed to track.

It’s like yelling “fire” in a crowded theater.

From a risk management perspective, it’s best to focus on the size of the exits in relation to the number of seats.

This is exactly the reason I do “meat ‘n potatoes” trading only.

Stick to instruments that are backed by real assets.

Such as ETFs backed by actual assets like stocks and bonds and some commodities.

A few leveraged ETFs are OK for swing trading, but only if they’re based on highly liquid futures contracts like the S&P 500 Emini.

I Haven't Traded Options in Over a Decade

The last time I traded an option was on Boeing in 2006.

There is zero reason to use options or heavy margin products, unless you want to lose all your money.

You sure can look like a genius writing options and getting premium over and over…sometimes for years.

(There are some options writing strategies out there that have a 90% win rate)

To many people it’s free money, but they are just like the turkey…they’ve only seen a minimal amount of action...

Then WHACK.

Off comes your head.

Conclusion: 

  • As Warren Buffett says, "Beware geeks bearing formulas"
  • Stick to what’s been proven, or you’ll be the turkey

About the Author

Hello! I'm Kurt the "Relaxed Trader" writing the stuff on this website. Feel free to ask me questions. I love talking to fellow traders that want to use computers to beat the stock market. Shoot me an email: Kurt@relaxedtrader.com

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