Equity option volume has more than tripled over the past 10 years, according to the Options Clearing Corporation (OCC), as Wall Street is starting to realize the benefits of trading options. And while the Dow Jones Industrial Average (INDEXDJX:DJI) and S&P 500 Index (SPX) are fresh off record highs, options can provide even more leverage than stocks -- if you know how to play them.
However, the world of options -- like the world of fantasy football -- can be a scary place for rookies. But while the rules, the research, and the rhetoric of each are often intimidating in their own way, the keys to both options-trading and fantasy success are actually fundamentally similar.
With the 2014 NFL season set to kick off soon, and fantasy football fans (including myself and several of my colleagues at Schaeffer's) busy with draft preparations, we thought we'd examine the eerily parallel path to both options-trading and fantasy victory.
So, whether you're about to embark on your options-trading journey or start laminating your cheat sheets ahead of draft day, take a few minutes to consider the following tips, applicable to both situations.
1. Don't Play If You Can't Pay
Options: Don't risk precious capital if you can't afford to lose it. When playing with options, you're going to have some losing trades along the way -- it's inevitable. As such, it's not wise to wager bill money or your life savings -- no matter what kind of "hot tip" or "good feeling" you have beforehand. As Schaeffer's founder and CEO Bernie Schaeffer says, "Intelligent trading decisions are rarely made when 'scared money' is involved."
Fantasy Football: Simply participating in a fantasy football league is fun. However, it's even more fun when you win. Don't be that guy dodging your dues -- it's not fair to the winner at payout time. If you don't want to fork over the cash on draft day, there are plenty of online leagues that let you join for free.
2. Practice Makes Perfect
Options: Before risking precious capital, try paper trading first. Utilizing a virtual trading tool (provided by most online brokers or sites like tradeMONSTER.com) allows you to test your trading knowledge, theories, and risk tolerance to see which strategies work for you and which don't. Make sure to take diligent notes in order to analyze each trade's aftermath, which will help you discover what kind of options trader you are and strive to be.
Fantasy Football: Before you head to (or log into) your league's live draft, try a mock draft first (you can find a plethora of free mock-ups online). The real deal can get pretty intense, as there's often a time limit on how long you have to make your picks. Plus, not every round will go according to plan, so expect the unexpected.
3. Don't Play By the Seat of Your Pants
Options: Research, research, research. It's crucial to examine a security thoroughly before initiating an option trade. For a multi-dimensional, well-rounded analysis, the Schaeffer's Expectational Analysis« methodology encourages investors to study a stock from a fundamental, technical, and sentiment perspectives.
Fantasy Football: Research, research, research. While it's a rare feat to know the stats of every NFL player, it's not smart to "wing it" without doing your homework. Be as prepared as possible before heading to the draft, and study a variety of cheat sheets and analyses for a balanced outlook on prospective players. And don't forget to check the injury reports, too.
4. Consider Outside Circumstances
Options: On the same note as No. 3, it's essential for option traders to be aware of outside circumstances that could be a catalyst higher or lower for the stock. For instance, before implementing an option play on stock XYZ, make sure you check the company's corporate calendar. A significant event like a date in the earnings confessional, or the release of monthly sales figures, could potentially impact your strategy.
Fantasy Football: While a player could look good on paper, his performance could be affected by circumstances outside his control. Consider a team's strength of schedule, for example, or the potential impact of a less-than-stellar quarterback on a wide receiver. (Or, in the case of the Ravens, make sure to check the local court dockets.)
Also, if there are two relatively equal players available when your draft pick comes around, let their respective bye weeks be the deciding factor. If you've already drafted two wideouts who'll be out Week 6, try to avoid picking up another one with the same bye week. Otherwise, you may be stuck scrounging for fourth-option receivers on the free agent list mid-season.
5. Do the Math
Options: Before entering a trade, plot the numbers. You should be cognizant of the breakeven levels, profit/loss potential, and any commissions or margin requirements to best understand where your play stands at any given time. For in-depth analyses on a variety of strategies, check out StockOptionsVolatility.com.
Fantasy Football: Take note of your league's scoring system before the draft. If your particular league awards more points for running yards than receptions, you may want to consider drafting a running back before a wideout.
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