Options Are a Tool, Not the Entire Toolbox
Thinking about options this way will improve your long-term wealth creation, in my opinion.
Hey traders!
I hope everyone is doing well!
Today I have a short newsletter that I write about how I think about options these days.
When I first got into options in 2013, I was drawn in because it seemed like a really easy way to get rich. As it turns out, that assumption was incorrect. Options trading is challenging because making accurate time-sensitive predictions is difficult.
The idea of using a little bit of money to make a lot of money was enticing as a 20-year-old with no money.
I set out on a journey in 2013 that has continued to this day, and I don’t regret it one bit (as you may know from watching my latest YouTube video on making $400K YTD as of the other day).
Options Are Like a Car
I’ve said this before in past videos.
These days, I think of options like a car.
Most people have cars because they serve a valuable purpose: getting you from point A to point B quickly and conveniently.
But just because you have a car, it doesn’t mean you drive it 24/7. Most cars sit idle 90%+ of the time.
I think of options the same way.
Just because I have a lot of knowledge and experience with options, it doesn’t mean I forget everything else and only trade options.
I believe that’s a mistake because it’s hard to believe that a trader will always have high conviction in short-term stock price predictions.
Options are a tool to be used when you have a good use for them, whether that’s hedging a profitable stock position through a potentially negative stock price catalyst or using non-margin-call leverage on a directional bet.
Non-margin-call leverage: If you buy stocks on margin or buy futures, you could get stopped out if it moves against you—closing at the worst possible time. If you buy a call or put, you can’t get stopped out because your max loss is what you paid for the option.
If you don’t have any good ideas or use cases for options, you don’t need to trade them.
I say this because, just like my 20-year-old self, I see many new traders get into options trading and forget about buying assets and holding long-term—everything transitions to making short-term options bets.
I firmly believe the largest sums of wealth are built holding solid assets long-term. It’s no surprise that right now, I see bitcoin as one of those assets due to the incredible potential reward relative to the risk. While BTC is near all-time highs, it’s still early.
Buying Assets IS an Options Trade
Buying a share of stock or unit of bitcoin is like a call option with a strike price of $0 and no expiration date.
If we look at the typical long call risk graph and look at a long stock risk graph with the $0 stock price in the middle of the P/L chart, we get this:
A call loses the max value if the stock is below its strike price at expiration.
A stock loses the max value if the stock is at $0. You can’t lose anything below that (of course, since the stock can’t go negative).
Both positions have no profit limit.
We pay less for a call option because we INCREASE the stock price where we lose 100% of our money (a 150-strike call loses 100% if the stock is below $150, while a long stock position loses 100% if the stock is at zero).
We also pay less because we have a time limit.
Shares of stock are expensive because our max loss share price is $0, and we have unlimited time.
Hopefully, if you think about it this way, you feel more empowered buying and holding assets long-term. You are essentially holding call options, especially a growth asset like TSLA years ago or bitcoin now.
What I’m NOT Saying
While I see options like a car: a valuable tool to be used in specific scenarios, but not all the time, I’m not saying that you shouldn’t learn about them.
I strongly believe knowledge is power, and learning about options unlocks powerful opportunities for you in the future.
All I’m saying is to not forget about buying and holding assets long-term, as doing so can provide you with some of the most significant and least stressful wealth growth over time.
Once I’m out of my MSTR options play, my options exposure will make up a much smaller portion of my overall investments until the next big opportunity surfaces.
If there’s not a screaming opportunity to allocate sizable funds, options will remain in my toolbox until I have another great use case for them in my portfolio.
-Chris