A fellow trading blogger wrote some things which really irked me. I’m not going to say who it was or link to the post as I normally do because basically all the guy does is plug his trading system in every post. He’s been on a multi-post rant about how people shouldn’t trade options or futures, or any other leveraged instrument for that matter. Two of the quotes this individual made in one of his recent posts in particular caught my eye.
With options trading, you need really good money management skills and many positions for diversification purposes.
If we took “options” out of the above sentence the first part of it would be fine. Good money management is a requirement of trading in ANY market. As for the requirements for diversification, to the extent that someone is going to diversify, it applies equally to any type of equity trading.
By the way, while investors who plan on long holding periods would do well to diversify their holdings, the same doesn’t necessarily hold for traders. In fact, the latter are better off keeping things concentrated so they can properly track their positions.
Since both options and ultra ETFs are about leverage, it makes more sense to go into ultra ETFs because they’re generally much safer than options and offer similar outsized returns.
I can’t help but wonder how the blogger is defining safety. If it has anything at all to do with the potential to take a loss larger than expected, then the ETFs are riskier than owning options, not safer. It’s a very simple thing. If you buy an option your risk is clearly defined. You can’t lose any more than what you paid. In the case of an ETF, however, you can easily lose more than you intended to risk because even if you use a stop there’s no guarantee of a fill at your exit price.
Now, if the blogger is equating risk to the odds of taking a loss, then that’s a different conversation. I’m still not going along with his take on things, however, because as I’ve previously noted in other posts, win % (or loss %) is not the sole determinant of performance.
I’ve said it before. It’s not leverage that creates risk. It’s how you trade. I personally prefer options for my equity trading because I can strictly define my risk and better manage positions on a running basis, plus they require less capital. That said, however, options suit the way I play the stock market. They will not do so for everyone.
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About the Author
John Forman, author of this blog, has traded for more than 20 years, is a professional market analyst, and authored The Essentials of Trading. He is an active participant in trading forums, consults for trading related businesses, as published literally dozens of trading articles, and has been quoted in a number of books and in the media.
** See John’s full bio.
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