I love options and I don't think it's a secret. I traded them professionally for years and I've used them personally in my own accounts as well. In fact, I rarely buy stock shares anymore, if it all. Right now the markets volatility is making put options even more attractive. Part of the Long Short radio show discussion today was about this very thing. (You can hear the recording here)
Most of us are conditioned to buy stock only, which is fine for some accounts to get dividends and not to be active, however, options are great for sell offs. People want to know how to profit in market sell-offs and I always tell them put options. That or futures.
Let me show you an example of a trade that I was in. Below to the left are the AMZN $1405 strike puts that expire tomorrow. The low yesterday was $2.90 or $290 per one contract. Now obviously the market had a brutal sell-off today and the stock was down near 5%. The options closed trading at $5,500 a contract. That is wild, even for someone like me to witness in years of doing this.
So what is making it possible? These large market swings - Amazon had close to a $100 move from yesterday today. Now, this is rare that they move THAT much but the markets are not looking great so they'll continue to do that. Even without the markets moving like this they still move well and for the fraction of the cost of shares. This is called directional option trading. If I think the stock or market goes lower I buy put options. It's a little different than selling premium which most new options traders get told is the 'right way' to use options.
I can tell you this - right now, that is not the best way to be trading them. It's directional. In fact, if we don't hold support on the Nasdaq then $5600-$5800 could be a real target and if that comes then this style of options trading will work. Oh, and on the flip side, when we rally, this will still work.
Click below to expand the image.