Extreme Trading by Carley Garner
Approaching trading a market with an extreme sport mindset and with a similar view to the risks and rewards makes sense. How? Find out here.
You may have heard of extreme sports, but have you ever heard of extreme trading? Activities dubbed as “extreme” are perceived as having a high level of inherent danger or difficulty and are most often individual activities. Each of these characteristics can, and do, describe the experience of being exposed to risk in any given market. Thus, approaching a market with an extreme sport mindset and with similar respect in regards to the risks and rewards of trading makes sense.
Being an extreme trader means entering a market with a contrarian trade in spite of popular opinion. It is important to note that there is a big difference between being “extreme” and being foolish. Trying to pick a top or bottom through the purchase or sale of a futures contract can be a form of financial suicide if the circumstances are against you. Only those who can relatively accurately predict the future should be comfortable buying or selling futures against the grain; sadly, I am not one of those people. If you are lucky enough to be that talented, you are probably not reading this article.
Times of high volatility and excessive pricing are perfect opportunities to sell option premium. During such market conditions, it is possible to sell options significantly out-of-the-money for a handsome reward, assuming that you are willing to accept the related risks.
For example, when the stock market was seemingly in freefall in mid-August 2007 following news of the subprime fallout, an extreme trader may have been selling puts while the broad market was trading as if the world was coming to an end. Executing such a trade may feel like bungee-jumping or parachuting. Timing is crucial and there is no room for panic.
OPTION SELLING BASICS
Option sellers attempt to collect premium in hopes that the time erosion and volatility decay will overcome any adverse price movement in the underlying futures market. The strategy offers unlimited risk and limited reward, but the odds of success on any given option are arguably better for the buyer than the seller.