How to Quickly Fix the #1 Reason Options Traders Lose
I’ve got good news and bad news and some more good news.
First the good news. Options trading has taken the financial world by storm! The Options Clearing Corporation, which processes every option order in the United States, reported that they cleared 10.38 billion contracts last year. And already this year option volume is up another 7.2%!!
That’s the good news.
The bad news is that retail investors haven’t figured out how to make options work. Retail investors have collectively lost $5 billion dollars in the past couple of years.
The reason? According to investigators, “Retail investors make ‘a trio of wealth-depleting mistakes.’”
Some of the best stocks to buy and hold forever are Dividend Kings.
These are the reputable giants of the market that’ll pay you to hold their stocks. So, not only do you get safety, but you can collect some extra income along the way. Even better, the Kings have a 50+ year history of raising their payouts.
Look at American States Water (AWR), for example.
American States is a reliable water and electrical utility company that’s been around since 1929. Better, for the last 69 years, it has increased its dividend. Last checked, it recently announced a quarterly dividend of 43 cents, payable on December 1, 2023, to shareholders of record on November 15, 2023. With this one King, you get solid growth, solid dividends, and a strong stock, which is actually oversold at the moment.
So, what other Kings should you buy and hold forever? Here are three to consider.
Genuine Parts (GPC)
Look at Genuine Parts (GPC), for example.
With a current yield of 2.84%, GPC recently raised its dividend to 95 cents in August. We expect to hear about a new dividend payout in November 2023. It also has a long history of navigating economic issues, and has a strong 67-year record of dividend payouts.
Granted, earnings were nothing to write home about in the third quarter, but it’s still one of the top stocks to buy and hold forever.
Plus, as noted by Seeking Alpha, “GPC is a boring, conservative dividend stock that is perfect for investors looking for dividend growth and potential capital appreciation. Automotive stocks like GPC are often overlooked but I believe they can be hedges against downturns. People will always need their automobiles and the parts associated with them.”
Procter & Gamble (PG)
Another boring, but very safe dividend stock to buy and hold forever is Procter & Gamble (PG). With a yield of about 2.5%, the company recently announced a quarterly dividend of $0.9407 per share. P&G has been paying a dividend for 133 consecutive years since the company’s incorporation in 1890 and has increased the dividend for 67 consecutive years.
Selecting the strike that is best for each trading strategy will depend on several factors. Straddles and Strangles are directional techniques and a trader can use the nature of how option prices change, via delta, to gain the best “bang for their buck.” Hindsight will always show what the best strikes were for the trade, but all traders have to live without this ability to see into the future when placing their trade. Though there are many variables that play into option pricing there do remain a few constants.
Through the option pricing model (the extremely complex formula used to create an options price), delta is one of these constants. The delta changes after each $1.00 change in the stocks price. This change comes from the gamma. As the stock moves in the correct direction for the option to profit directionally, the delta gets larger. As the stock moves adversely from the option, the delta gets smaller. It is this changing of the delta that is key to how Straddles and Strangles profit.
Imagine a trader is in a Straddle or Strangle trade. As the stock price increases (moves higher) the delta on the call side grows, while the delta on the put side shrinks. Essentially the call is gaining more value at this point than the put is losing. A table format like the one shown below makes it easier to see what is happening.
Before I share the handful of stocks releasing their Earnings this upcoming week, I would like to wish all of my students celebrating a birthday this coming Friday by giving them a big Oorah (Ooh-rah?).
Tuesday, November 7 Before the Open: Uber Technologies (UBER) After the Close: eBay (EBAY)
Wednesday, November 8 Before the Open: Biogen (BIIB) After the Close: Disney (DIS), Virgin Galactic (SPCE)
I want to start my discussion on stock options by looking at options on the Volatility ETN VXX, more specifically the trading results of a couple of your Fellow Students. But before I do that, I want to share some of what was written in last week’s edition of the newsletter.
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