Options Trading, Part II

The key to any kind of trading is thinking of every trade as a negotiation. When two sides sit down across from each, rather you are the buyer or the seller, both have weaknesses and strengths. Both have reasons they want to participate in the trade, and if you want to make abnormal profits, you need to know why you are capable of making those profits.

Quickly though, let me first explain what abnormal profits are. Abnormal profits are as it the term suggest, profits that are unusual. For example, if you suddenly find gold, you would profit off selling them. But no one will pay you more than the market price for it. That is a normal profit. An abnormal product would be say, gold is going for $100, and normally is costs you $80 to dig up gold, but all of a sudden, you discover a cheap process that finds you gold for $50 and you still sell it for $100.

Abnormal profits occur from having a comparative advantage. If you don't have an advantage, you aren't going to make abnormal profits.

So why do you care to make abnormal profits? Because with the increased riskiness of options, and the sheer amount of extra work you need to put into it, what's the point of getting a 15% return at year end when you could have just bought say the Nasdaq index and just let it sit there for a year for the same return?

I will continue posting for the rest of the week my views on Options Trading. But if you want to profit from what I post, you first have to ask yourself, what comparative advantage do you have over other traders?

Maybe you are smarter, or have a keen analytical sense, or perhaps Greenspan is your next door neighbor. Any of those are fine, but you have to know your advantage so that you can tailor your strategies around it.

[Update] I wanted to add as an incentive to consider your comparative advantage, the difference between me knowing what it was and just playing the market. Last year, I obtained a 10% return over 6 months following classic investing strategies, while this year I have so far obtained a 21% return in the last 2 months (I only started trading again in the last two months).