This Week…

We’re looking at how understanding the options market can supercharge your investing acumen.

In this issue, we’ll cover 2 things:

• Why understanding the options market is increasingly important.
• Simple options strategies to elevate your trading.

Let’s get into it.

Welcome to the Game

Welcome to The Game of Investing, a bi-weekly newsletter bringing you “aha” moments and actionable lessons from Real Vision experts. No matter your level of expertise, markets are tough — which is why we all have to put in the work. Ultimately, the game of investing is a competition with yourself. Our mission is to help you navigate the path to success. Prepare to level up.

LEVEL 1  — Why Use Options 

There are typically a few reasons why traders and investors use options:

• As speculation: Betting on market forecasts to profit from directional movements in a stock or other asset. Those of you who followed the Gamestop saga know all about this.
• As protection: Options are a great way to hedge existing portfolio positions against market drawdowns or volatility price events.
• As income generation: Earning premium income by selling options is a popular strategy used by many investors.

But there’s another reason why some traders study the options market so closely: to read the flows.

• Options flows are real-time records of large options contract trades, including the number of contracts, strike prices, and expiration dates, done by highly sophisticated institutional traders.

Following the flows can help traders see in real time what institutional investors are betting on by identifying patterns like open interest, skew, and term structure — which all provide hints on future market direction and timing.

In this interview (paywall) between Options Insight founder Imran Lakha and Cem Karsan, founder of Kai Volatility Advisors, Cem explains how he reads the flows to identify potential “windows of strength or weakness” in the markets.

• “These flows have a significant effect on how and why the market moves the way it does,” he says. “It’s a function of time and volatility, and you can see where [market makers] have to hedge their positions.”

Intermission — All Aboard… 

We are hurdling toward the Economic Singularity — the golden age of AI-driven productivity, where infinite knowledge workers hit the economy and millions of normal jobs and businesses will face a new reality.

One thing that’s become quite clear is that nobody is prepared for the technological revolution.

That’s why Raoul Pal co-created the Exponentialist with David Mattin — to better understand where we’re headed and how to safeguard our future.

Raoul believes we have about 6 years to make as much money as possible before the world is forever changed.

Last week, Raoul and David brought on options legend Imran Lakha and macro analyst Julien Bittel to bolster their trade portfolio and research services.

• Since its inception, the Exponentialist portfolio has outperformed the Nasdaq by 3X.
• Now, Imran is providing near-zero cost options trades to earn income and hedge against drawdowns to your core portfolio.

For the first time, you can start a trial for just $1 to see everything the Exponentialist team is up to.

LEVEL 2 — Protect and Profit

When it comes to trading strategies, there is no shortage out there. Today, we’ll focus on a few of the simple options techniques that can help you protect your core long-term portfolio and maximize income in the near term.

Sidenote: before trying any of these techniques with real money, test them out in a trading simulator.

And to refresh your memory, here’s a past issue outlining how options pricing works and how to read an options chain.

Starter Strategies

Long calls: If you’re bullish on an asset over a certain period of time, buying calls is the clearest expression of that outlook.

Long puts: Inversely, buying puts expresses a bearish outlook on an underlying security.

• When buying an option, your downside is limited (you can only lose the premium you paid) and your upside is significantly higher.
• It’s important to always keep the option contract’s expiration date in mind. The less time until expiry, the faster an option will decay in value.

Covered calls: If you own an underlying asset and expect minimal price movement in a certain timeframe, selling call options against it is a great way to get downside protection and generate income through the collection of decaying option premium.

• Keep in mind, this limits potential upside if the underlying asset does move higher.

Protective Puts: Similarly, if you own a stock, you could purchase put options for the equivalent number of shares (1 option contract per 100 shares).

• Consider this an insurance policy if the underlying stock drops significantly.

Long Straddle: This trade lets the investor bet on expected future volatility without having to predict whether an asset will go up or down — because a sharp move in either direction will lead to profit.

• The trader buys both a call option and a put option at the same at-the-money strike price and expiration date on the same underlying security.
• A long straddle can only lose the sum of the cost of both premiums, but the reward is theoretically unlimited to the upside.

🔑 For more insights into how options trading fits with all the strategies we’ve covered in the Game of Investing, here’s a link to a free report we published recently. If you’re not an RV member yet, all you have to do is make a free account in just a few seconds.

Next Time

Thanks for reading. In our next issue, we’re digging into why understanding global liquidity is more important than anything else. 

See you then.

Have feedback on The Game of Investing? We’d love to hear it. Just email us at essential@realvision.com to share your thoughts.