PREFER BUYING OPTIONS OVER SPREADS AND WHY? Report #11

Prefer buying options over spreads and why!

REPORT # 11

After two weeks and hours of study, decided to skip DEBIT and CREDIT SPREADS and stick with buying of straight option PUTS and CALLS.

The basic reason why, is that; SPREADS are directional movements on the INDEX as are straight buying of PUTS and CALLS.
The advantage of a DEBIT spread is basically the elimination of threat by TIME DECAY. Which in of itself is no mean advantage. The SPREAD though is only good for a trend anyway. The credit spread is superior due to getting money up front in your account, but more dangerous as you will lose at least 50% and wipe out the low profits from 5 trades, or a couple of months earnings, if the index reverses and touches your start point forcing you to exit. If you wait, the losses mount a lot more.
I feel that you can do as well in this regard by choosing your trades selectively and trading particularly in trend trades, by staggering your straight buys in a TREND as you enter the trend. Each new trend buy on new signals, that the trend is still in force will earn less, but still positive. If you have a strong sense of the end of a TREND, then you get out all of them before the trend finishes. This allows you to put in a lot more of your capital, rather than limit yourself like in futures type limited size trades. OEX long trends of 12 to 18 days tend to peter out with a lower VIX and loss of volatility, and also the daily range ( TR and ATR ) gets smaller. There are reference websites that give both, but you can basically see it on a bar chart.
When you lack the volatility and the daily TRUE RANGE, or ATR estimate, then you should be on the sidelines in cash anyway, as the trend moves to it's inevitable reversal. My interest in spreads was in capturing the slow small incremental trend moves in the OEX, when it is tiring and exhausted and both volatility and daily range is small and unchanged. You lose profits to TIME DECAY by sitting in the end of the OEX trend. I thought spreads might capture that. The risk though is higher using spreads than staying on the sidelines watching patiently for a reversal, in cash.
I feel that a SPREAD advantage at this section of the trend, does not outweigh the more common sense approach of leaving the finishing trend and taking your cash and sitting on the side lines. Most effective traders will tell you over and over again, that UNDER TRADING and PATIENCE, are hall marks of a healthy annual bottom profit line. It is not what you gain, but what you avoid losing that is important.
e.g. Let us presume you make 10 trades a year and made 17% on each trade. At the end of the year you would have a 170% gross profit in your account balance, by avoiding losses and staying in cash when you should. Some people do more! It is not unusual to earn 8% to 35% on option trades, of two weeks. Professional rich traders talk a lot about LOSS control and the writers on the internet emphasize taking losses quickly, particularly if you over trade. Which is true enough, but not the whole story. To me that above is true, but real LOSS CONTROL is to stay out of trades that are not rock solid guaranteed setups, to work. 6 Option trades a year that are profitable, are better than 300 trades a year that a large percentage lose. ( I'm a starting amateur so take this opinion with a grain of salt! ) The best earners I've known in trading did only one or two trades a year. Go figure that!
Frenetic trading activity is not trading for profit, it is pure gambling. Just my amateur opinion. Doing this type of control is harder than it reads though. Try it and you will see. When a rich trader tells you PATIENCE is the best skill, they mean sitting in CASH watching for a guaranteed type trade setup you are confidant of. VERY HARD TO DO THIS, as I'm finding out.
QUICKIE TRADES are more speculative or gambling type and you take your losses when you are wrong. Quick loss taking when you are wrong is paramount. You are having fun though and meeting the mental challenge. Just don't expect to get rich.