Just a few days ago, Karim Rahemtulla, one of my counterparts at Mt. Vernon Research, stopped by our office in Delray Beach, FL to say hello. I think he was only looking for some chocolate, but, as is often the case when two traders get together, the conversation turned to the market.
It turns out we were both trading the S&P Financial Select SPDR (XLF) put options. (Just a reminder: Puts are instruments that benefit the buyer when the stock, or, in this case, the ETF, drops in value.)
Now the odd thing is that Karim was selling the XLF puts and I was buying them. He was betting that the XLF would remain above the 20 level. So he was making money by collecting the premiums and letting the puts expire worthless.
I was buying the April 28 puts, which meant that I made money when the XLF fell from $27.50 to $24.50.
Two totally different approaches to trading the XLF puts. But we were both making money.
I prefer buying options to selling options. When you buy an option, the worst that can happen is you’ll lose 100 percent of what you paid for it. Meanwhile, your upside is unlimited. When you sell an option, your gain is maximized then and there. But your downside is unlimited. Given the choice, I’d rather maximize the upside and minimize the downside of any trade I make.
That is the name of the game when it comes to trading. There are many ways to trade. There are many ways to make money in the market. The key is to find the type of trading that works best for you.[Ed. Note: Rick Pendergraft is a professional trader and market analyst. In Rick’s new investment service, he gives easy-to-follow, step-by-step advice that you can use to create consistent, automated income. ]