Slope of Hope Blog Posts

Slope initially began as a blog, so this is where most of the website’s content resides. Here we have tens of thousands of posts dating back over a decade. These are listed in reverse chronological order. Click on any category icon below to see posts tagged with that particular subject, or click on a word in the category cloud on the right side of the screen for more specific choices.

Choose a Trade that Fits Your Risk Profile

By -

There is a reason why out-of-the-money options are so cheap; it’s the equivalent of buying a lottery ticket. And gamblers love lottery tickets.

But unlike the typical lottery system where the seller of the ticket pays only a small portion of the overall proceeds in the form of winnings, options are a zero-sum game in the truest sense of the definition – winner’s profits are loser’s losses. And the majority of loser’s losses typically come in the form of speculative out-of-the-money plays.

The winners know how to skew the results. Moreover, they know the risk-reward and the probability of success BEFORE each trade.

In the options world the gambler is defined by a trader who buys a call or put with a delta of .35 and below. (Delta is the probability that an option will expire in the money.)

Like lottery tickets in the store, options with deltas this low have a low probability of success. But because of their cheap price and high-profit potential, they lure in newbie options traders.

This is why I prefer to take the other side in this zero-sum game. I do so by essentially taking the other side of the trade – by selling options to the speculative crowd.

(more…)

How to Become “The Better” Options Trader

By -

Who is the better options trader?

A.    Two Nobel Prize winning economists who founded the very model that options pricing is based on.

Or…

B.    A guy who thinks the market is like a giant poker game.

Of course, it's A … right? They are the geniuses, after all. I mean, they wrote the Black-Scholes options pricing model – the pricing model that every options trader uses directly or indirectly on a daily basis.

(more…)

The Only Way to Successfully Use Options Over the Long-Term

By -

Any time you make a bet with the best of it, where the odds are in your favor, you have earned something on that bet, whether you actually win or lose the bet. By the same token, when you make a bet with the worst of it, where the odds are not in your favor, you have lost something, whether you actually win or lose the bet.

-David Sklansky, The Theory of Poker

As I always say, investment success comes from process.

Let me explain.

Back in my early 30s when I was privileged to live in sunny Flagstaff, AZ, I would take the reasonably short drive to Las Vegas so that I could make one the best bets in the gaming world.

For those not familiar with the game of craps, the free odds bet placed behind an opening pass line bet carries no house edge. The casino makes no profit on this bet. This is the only bet you can make on a table game where the odds aren’t against you.

How can the casino make this bet available when they don’t make any money on it? Simple: Most players aren’t smart enough to make this bet.

(more…)

The Benefits of Credit Spreads…Gangnam Style Continued

By -

Fifteen minutes before the close Wednesdayit looked like the bulls were about to claim victory for the third straight day. But, to the bulls' dismay, the bears made a last minute appearance. The push lower took the S&P 500 (SPY) from $144.90 down to $144.00, which is where it sits after the close.

The move doesn’t seem like much, but the S&P was higher almost 1.0% Wednesday, before eventually closing the day down roughly 0.75%. If the bears are serious a move below $142.50 would have to occur before they are taken seriously.

Even after the move lower Wednesday, there are still several key ETFs that are in a short-term overbought state. I am watching FAS closely and EWY, the South Korean ETF.  A push lower in FAS would certainly be a sign that the market in general is headed lower which would be wonderful for my SPY bear call spread. However, I am a but more interested in EWY.

(more…)

The Biggest Leap In My Trading Career

By -

Trading often appeals to impulsive people, to gamblers, and to those who feel that the world owes them a living. If you trade for excitement, you are liable to take trades with bad odds and accept unnecessary risks. The markets are unforgiving, and emotional trading always results in losses.

– Alexander Elder (Trading for a Living)

I love Mr. Elder's quote. It embodies the typical retail options trader. Why do you think the most popular options strategy among retail options traders consists of buying out-of-the-money straight calls and puts?

There is a reason why out-of-the-money options are so cheap; it's because they are the equivalent of buying a lottery ticket. And gamblers love lottery tickets. Look no further than the hype around the latest Powerball jackpot.

But unlike the typical lottery system where the seller of the ticket pays only a small portion of the overall proceeds in the form of winnings, options are a zero-sum game in the truest sense of the definition – winner's profits are loser's losses. And the majority of loser's losses typically come in the form of speculative out-of-the-money plays.

(more…)