You might assume that speculating with options and playing fantasy football have very little in common, but you'd be wrong. To start, both have become more mainstream lately -- equity options volume surged 13% year-over-year and last month was the third highest month of volume on record, according to the Options Clearing Corporation (OCC). Fantasy sports, meanwhile, maintained its popularity during a pandemic thanks to sports gambling platforms like DraftKings (DKNG). Leagues are still commonplace, yes, but daily fantasy and a variety of other games are roaring in popularity. Still, the options and fantasy arenas can be scary places for rookies. So while the playing fields are evolving over the last six years, the keys to success on both fronts are actually fundamentally similar.
With Week 1 of the 2022 NFL season underway, and fantasy football fans (including myself and several of us here 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, make sure you obey these 10 Commandments:
Commandment 1: Thou Shalt Not Play If Thou 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, obviously. Don't be that guy dodging your dues -- it's not fair to the winner at payout time, or the commissioner who has to take a baseball bat to your knees. 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.
Commandment 2: Practice Makes Perfect
Options: Before risking precious capital, try paper trading first. Utilizing a virtual trading tool (provided by many online brokers) 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 and move quickly, as there's often a time limit on how long you have to make your picks (and please, for the love of all things good, don't be the guy who takes the full two minutes). Plus, not every round will go according to plan, so in the words of Julie Chen, expect the unexpected.
Commandment 3: Thou Shalt Not Play By the Seat of Thine 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, Schaeffer's Expectational Analysis® methodology encourages investors to study a stock from fundamental, technical, and sentiment perspectives. Schaeffer's V.P. of Research Todd Salamone broke down his methodology to us in our Market Mashup Podcast.
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 and cut lists. With that being said, I'd like to take a moment to pay condolences to those that that drafted Dak Prescott or Keenan Allen.
Commandment 4: Thou Shalt 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 option prices and your strategy.
Fantasy Football: While a player could look good on paper, his performance could be affected by circumstances outside of 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.
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 with a Week 6 bye, try to avoid picking up another one with the same bye week. Otherwise, you may be stuck scouring the waiver wire for fourth-option receivers come mid-season.
Commandment 5: Thou Shalt 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 our new and improved Education section.
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. In the same vein, if your league docks points for turnovers, Jameis Winston -- for all his chaotic glory -- might not be the most prudent move.
Commandment 6: Thou Shalt Get What Thou Pay For
Options: It's basic economics that an item in high demand will command a higher premium. Options are no exception to this rule. By comparing a stock's historical volatility (HV) to an option's implied volatility (IV), you can gauge whether the option is relatively cheap or expensive at the moment. However, seasoned options speculators can take advantage of inflated premiums by employing strategies like the short put or short call.
Fantasy Football: In some fantasy leagues, you draft a player by outbidding everyone else. In auction leagues, make sure to budget your money before the draft, so as not to overspend on one player early on and short-change yourself in the final rounds. For example, don't spend so much cash on hopes of a resurgent Saquon Barkley and end up with Mitch Trubisky as your QB (talking to myself, here).
Commandment 7: Thou Shalt Hunt for Sleepers and Busts
Options: As contrarians, we like to find outperforming stocks surrounded by skepticism. If the shares of an equity have powered higher on the charts, but the Street still remains leery, the unwinding of that pessimism -- in the form of upgrades, price-target boosts, a short-covering rally, or a reversal in sentiment in the options pits -- could act as catalysts to launch the stock even higher.
On the flip side, contrarians also enjoy foraging for underperforming stocks surrounded by optimism. If a security is in the midst of a long-term downtrend, but the Street remains bullishly biased, an unwinding of that optimism could pressure the stock even lower as the bulls abandon ship.
Fantasy Football: Ahead of your draft, research undervalued players with star quality. These often take the form of rookies or recently traded players that tend to get drafted in the later rounds. Meanwhile, don't waste a high draft pick on overvalued players with little chance of making an impact. These busts often turn out to be the aging or injury-prone players that spend a large chunk of the season on the bench.
Commandment 8: Thou Shalt Not Be Afraid to Handcuff
Options: Unsure about the future of a stock or particular sector? Try hedging your bets pairs trading. By simultaneously opening two related option positions, you allow yourself a safety net to guard against an unanticipated move in a specific sector. For example, to hedge against potential weakness in the pharmaceutical sector, an investor could buy a call on outperforming ZYX, and simultaneously purchase a put on underperforming rival XYZ. As long as the profits from one trade outweigh the losses from the other, your pairs trade is money.
Meanwhile, you can handcuff a long position with a short position, if you want to reduce your risk on a single stock. Shareholders of XYZ can "handcuff" their stake with a protective put, for example, while modestly bullish traders can initiate a relatively conservative play on XYZ by executing a long call spread.
Fantasy Football: Unsure about the future of an injury-prone quarterback? (Or Tom Brady for the umpteenth time…) Try hedging your bets with a handcuff. By picking up the player's backup -- wait until the later rounds, of course -- you can guard against any season-ending injuries.
Commandment 9: Thou Shalt Know Where Thou Stand
Options: Don't be a passive investor -- ignoring your trades could be fatal to your portfolio. Once you've initiated your option play, it's vital that you keep close tabs on the position. If you see that your position is tanking at a rapid-fire pace, simply praying for a miracle often exacerbates the losses. Instead, avoid clinging to losing trades, and consider setting stop-loss levels to prevent a massive deficit in your trading capital.
Fantasy Football: Don't be a passive fantasy football player (unless you're playing me that week... woo!), as not paying attention to your lineup could cost you the win. As alluded to earlier, being unaware of a player's bye week could leave a critical void in your lineup. On that same note, pay heed to a player's health status. If it seems like your kicker is eternally on "injured reserve," don't wait too long to drop him for a player with fewer health concerns.
Commandment 10: Thou Shalt Lose With Dignity
Options: As mentioned earlier, all option traders will take a hit every now and again. The trick -- besides proper allocation and portfolio management -- is to take the losing trades in stride. Have realistic expectations heading into every trade, don't let fear or greed outweigh common sense, and -- most importantly -- stay in the game.
Fantasy Football: As much as it hurts to lose to your Great Aunt Kathy, remember that playing fantasy football is a game. Just as no one likes a showboat, no one enjoys a poor sport, so stay classy this season and, more importantly, have fun. Good luck!