Creating that competitive advantage in Options

First lets understand what competitive advantage means. In short, we want to be doing things which gives us that superior edge over the others, which can take in many different forms - higher win rates, more concrete analysis approach, wider variety of option strategy toolkits etc.

Developing a unique competitive advantage does not have to be complex, but it isn't super easy either.

If you take a look around, and if you stuck around in the financial markets long enough, you will realize that nearly 95% of the instructors out there are focused only on basic methods. Basic methods are the 4 basic option trades you perform - Buy Call, Buy Put, Sell Call, Sell Put.

Many instructors swear by solely Selling Puts, which can work well as a method but without other factors in play such as technical analysis, fundamental analysis and price action to complement this basic method, all it takes is a red day for you to see a huge loss.

This is the reason why you should start to develop your competitive advantage over time. You are Charmander now. Your goal is to become Charizard. That is the reason why on Arete, we learn and execute a wide range of strategies from beginner-intermediate-advanced.

Buy call/put, sell call/put still forms the foundational work, but you need to progress and start doing intermediate strategies like spreads and combos, and eventually calendars, diagonals, iron condors etc... because each strategy will work well in a different market situation.

Case in point - a combo is a good strategy to do only when markets hit a low, which happen less often than we expect. In September 2021, we had a minor pull back, which allowed us to reap +6000% for $FVRR and over +2000% for $BABA using this combo strategy.

Learn to learn.

It is easy to fall into comfort and get settled in thinking that "all i need to know is sell put to generate income" / "I can just use the wheel strategy" and stop exploring and learning from the get go.

More often than not, it is not as simple or straightforward

How do I know? Time + Experience. And I started with a relatively smaller account before, I understand the pains and limitations of starting off with limited capital.

Let me share a bad experience so you learn from my mistakes and do not make the same.

Back in my green horn days, I was told that I can simply sell puts and make $50 per contract each month for a start, with a small account size of $3000. Was told it was possible to do multiple contracts with this small capital as well. If you have $50,000, sure go ahead, unfortunately I did not.

So I thought to myself, lets do 5-10 contracts, and make $250-$500 per month. That's a nice % return in 1 month. Sounds good. All the instructors told me it was possible.

Well, that's only the tip of the iceberg. Lowkey felt betrayed lol.

There are several reasons why but let me summarize the key ones:

- Selling naked puts require relatively more option buying power. Therefore, with $3000, we will not be able to sell too many contracts. The broker will NOT allow it.

- It is not smart to be selling multiple contracts on a small capital, if the stock goes south you're screwed.

I lived and learn, and learnt to learn. So, please, don't get sold by these seminar people who have little to no technical skillset at all. Be smart about it.

Once you understand these capital constraints you can then strategize your portfolio better to stay competitive. In Arete we are able to empathize with people with smaller capitals, and share the loopholes to avoid. We will not share something which is unrealistic or impractical.

Develop a investing/trading plan

See each trade set up as a new problem and solve it accordingly. It is important to have a structured approach in place, it does not have to be followed to the tee and seen as a holy grail but you still need a skeleton in place.

Here's a quick example to explain what I mean.

Let's talk about Personal Finance.

The overall formula is Total Monthly Surplus/Deficit = Income - Expenses

Whatever money that flows in falls under the Income Category and whatever money which flows out falls under the Expenses.

This is your structure. If you don't have a high-level structure in place, each month you will waste energy over thinking where to park each of your inflows/outflows.

Here's a free budget spreadsheet (just save a new copy for your own use) https://docs.google.com/spreadsheets/d/1pkh2Ul2074NVgtIU6kR8v5d78y5MJ26Knk-7YtkTIZs/edit?usp=sharing

Shoutout and credits to Celesmeh

Back to the point...

Behind every trade done is a few minutes of analysis (1-2hours if you are a beginner/noob, but you get much faster with time and practice).

To do this analysis you need a structured approach to solving the problem; recap that each trade set up is seen as a new problem.

I obviously will not share the detailed breakdown of the structure but here's a few key questions you need to ask yourself which your structure should help you answer.

- What is the overall trend?

- What are the buy/sell zones?

- What are the indicators which affirms your investment thesis?

- Risk/Reward ratio?

- Probability of winning?

- Exit/Take Profit level?

Once you figure out these questions, you can then proceed to find the studies/toolkits to help you run this analysis.

If you are entering trades based on 30 second intuitions then you will likely get sub par results in the long run.

In the end, your competitive advantage is your ability to think critically, structure your trade plan, execute it, manage your risk and stick to your investment thesis, along with some guts. Do not fall into analysis-paralysis.

Part of Arete service includes teaching on how to perform such comprehensive and structured analysis. However, this will be suitable only for those who are intermediate-advanced level. If you are a beginner, you need to gain experience first.

Godspeed,

Mr. Arete