A Basic Philosophy
&
The Both Sides Strategy
My bias as a trader is very much (but not exclusively)
toward the technical side with my preferred trading vehicle being the
purchase of options on futures, with a typical trade having a three to nine month perspective. What follows is
a brief description of the Both Sides Strategy I often employ to take
positions....All references to gains and losses are made with the
understanding I am
using long options strategies only.
If you trade futures, whoever you are, much of the time you are
going to be on the wrong side of the market. My approach to trading assumes we
are definitely going to be wrong some of the time.
Futures are inherently volatile...and my perspective is, what we are
really trading is volatility. All the markets will have periods of sideways
action, but all of the markets are frequently trying to move up, or down. Your objective
is to be going with them when they are really going somewhere.
Futures are highly leveraged. Get
on the right side of something which is truly moving and high percentage gains can be a
function of that leverage. It goes without saying that same leverage can also lead to
high percentage losses.
Buying Futures Options allows you to be on both sides of the market
at the same time. Just what it says. You can buy options in both directions
and whichever way the market goes (if it does move), one side will generally benefit from
it, one side will not. Of course, if it doesn't move, neither side will benefit, and
you will probably lose money.
Select markets which have done nothing for a long time.
If a market has been trading sideways for quite some time, probabilities
"should be" (anything is possible in the futures markets) better it is soon
going to move somewhere. Long sideways move are often followed by large directional
moves.
Or select markets at price levels at which you can make the
statement, " It will not stay here, and, in fact, should move a long way from
here, one way or the other". As an example, you might
look at a market making the same high for the fifth or six time in six
months and say, "I don't know which way it's going, but it's not going to be
right here six months frm now". Obviously, it could be, but, again,
probabilities "should" favor it moving away from this old high, and this
move could be either substantially up, or down.
When you find something you like, put your money on it, but buy some
options going opposite your opinion. This goes against everything
you will feel. You think you are right or you wouldn't be making the trade.
Most of the time, my
recommendations are in units of two calls to every put for bullish opinions, or two puts
to every call for bearish opinions.
There are then three major scenarios....
1. The market does move, only it goes the wrong way.
Your objective is then to sell the options you purchased as "insurance", as well
as those representing your opinion, (whatever they are worth), when, and if, you are able
to put most, or all, of your investment back in your pocket. Our experience is, when
most people (ourselves included) are wrong, they are very wrong. Not only does the
market not move in the direction they anticipated, many times it goes exactly opposite
their opinion in a big way. We find, if we are wrong, using this strategy, even a moderate
move the wrong way may get you most, or all, of your money back. Obviously,
it must repeatedly be noted that if the market does not move in either
direction, you easily might lose 100% of your investment, including all of
the costs (commissions & fees) associated with buying or selling the
options.
2. If you are truly right in the market, you will lose the money you
spent on insurance, but you will probably not miss it. If you are right, as a
function of the leverage you work with, you have an excellent chance to make enough on the
trade to see the insurance, in my opinion, as only a relatively small cost of doing smart business.
3. If the market you enter continues to go sideways, you stand a
good chance of losing on both sides. If you get in something which is
statistically "due" (in your opinion) to go somewhere, and it still doesn't move
during the time you are positioned, you might lose all of your money you have in the
trade. But the same trade will still be there and the probability (again, in your opinion)
of an impending move may have gone higher. You can put the trade back on by buying
options with more time until expiration. Futures are inherently volatile.
Sooner or later, they DO move.
Obviously, there are many, many permutations as to how the
markets can move, and, consequently, it would be impossible to outline every
possible dollar outcome when using this strategy. The approach certainly doesn't guarantee profitability, and it certainly
doesn't work all of the time, but you CAN be wrong and still get some, if not all,
of your money back off the table (or, it goes without saying, you can lose every
dollar you have invested)....And, when you are right,
in my opinion, you
will not miss what you have spent on insurance.
This is obviously a rough outline of a concept developed over a number
of years. There are no specifics here as to how how I make my choices, how I
diversify, how I determine what options to buy, or how much time I give a
trade, etc... Suffice it to say, over the years, I have drawn thousands of
lines, studied thousands of charts and indicators, and finally reduced the
trading process to what I
think are some fairly simple rules and approaches. If you are interested in finding out
more about what I'm about, give me a call. There is no email address listed
on this site, as, if posted here, it becomes an incredible magnet for
spammers.
Thanks,
Bill Rhyne
866-578-1001
770-425-7241
Kennesaw, Ga.
