#17 - Can Just Trade Options And Never Stocks?

Episode of: The "Daily Call" From Option Alpha

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Oct 9, 20176m
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#17 - Can Just Trade Options And Never Stocks?
Oct 9 '176m
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Hey everyone, Kirk here again and welcome back to the daily call. On today’s call, we’re going to answer the question, “Can you just trade options and never stocks?” The simple answer to this is yes. I do believe that you can (moving forward) just trade options and never stocks. The only reason I say that is because options have the ability to give you a synthetic or equivalent stock position without all the capital that’s required to do it. You might hear some clicking in the background, but as I’m doing this right now, I just want to prove the point or give you guys an example of what I’m talking about.

To use the broad-based markets which is the S&P, the ticker symbol is SPY, if we wanted to buy stock in the SPY, we could buy it for $245 right now. I’m just rounding up just so that we have some kind of round numbers to work with. That would be actual capital out of your account (if you bought 100 shares of SPY) of $24,500, so $245, 100 shares, $24,500. That’s a lot of money out of your account. In fact, in most brokerage accounts I think by the statistics wise are like $10,000 when people open up. One position in the market would be two or two and a half times what the average broker account is, so that’s really, really challenging. But the question is, “Well, how can we replicate this or synthetically trade this with options?” Well, you can because there are things called leaps which are just basically just long-term options. You don’t want to really use them any more than that. But options give the ability to leverage 100 shares which is one contract. That’s the beauty of it to replace synthetically the stock that is out there.

In this case, let’s say that we wanted to trade SPY. We still want to go long the markets big time. We’re still very, very bullish on the markets. That’s why we were going to buy 100 shares. You know the whole song and dance here. But you can actually accomplish this by buying deep in the money call options on the broad-based markets. In this case, we’re looking at the December contracts for 2018 which is 480 days away from the time I’m recording this podcast. Those contracts are $65 apiece like option wise which turns into notional value of $6,586 just to be exact. For $6,586, you can basically replicate a long position in the broad-based markets. This has a strike price of 180. Remember, the stock is trading at about 245 right now, so if you wanted to, you could get into this position and you would be capped with the markets going down to 180, meaning you don’t lose anything if the markets go down at 180 other than the $6 grand out of your premium that you paid for that. But let’s say the markets crash. You’re still actually protected somewhat on the downside from a total collapse in the S&P between now and December of 2018. For basically almost like a fourth of the value, you could actually be considerably less, replicate a stock like portfolio just with options.

Now, just to be clear on this podcast as we’re talking about it, I’m not suggesting you do this. I don’t think you should ever need to go that far out in your trading. Never do I suggest that you need to do this, but I’m showing you and I’m hopefully proving the point that you don’t need to trade stocks in your account. That stock is actually incredibly inefficient. It’s still something that a lot of people trade. I perceive that it’s going to be something that people trade for a long time. I don’t see stock going anywhere, anytime soon. But as far as capital is concerned, stock is very, very inefficient for the individual investor for this exact reason. Plus with stock, you don’t have the ability of margin for error.

With options trading, as you’ve seen in probably our coaching or our training videos or whatever you’ve done or even listened to this podcast, with options, you have a margin of error, meaning that you can be wrong on your direction and still make money by selling premium and with stocks, you can’t do that. As soon as you buy a stock and you’re only going to be invested in stocks, you got to be the right or wrong at that decision point. That one point that you’ve bought into those shares, you better be right that the stock is going up or down or whatever the case is. With options, you can have a range. You can be right even if the stock goes down or stays the same or it goes higher and that is very, very powerful. You start giving yourself the choice, the ability to do that, you start dramatically increasing your chance of success, you start reducing your overall portfolio volatility which means you don’t have as many ups and downs in your account and you start having a more consistent stream of income coming in.

Again, to answer the question, “Can we just trade options and never stocks?” 100%. Absolutely! You can do everything basically you want to do with stock or you can accomplish it with options. As always, hopefully that helps out. Until next time, happy trading!

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