Dreams have been shattered…
….legends have been made…
…and then there were four
Unless you’ve been living under a rock, the NCAA Men’s Basketball Tournament started two weeks ago.
The tournament began with 68 teams, competing in a single-game elimination tournament to see who the best college team in the nation is…With over 65 games being broadcasted and streamed throughout March…it’s hard not to pay attention… no wonder they call it March Madness.
According to the American Gaming Association, nearly 40 million Americans filled out more than 70 million tournament brackets. Heck, even the President of this country found time in his busy schedule to fill one out.
Maybe you filled out a bracket in hopes of winning money, prizes or bragging rights over your friends, family or co-workers.
Of course, everyone was searching for that all elusive perfect bracket. However, it’s nearly impossible. ESPN had over 11 million entrants this year in their contest, but after the 35th game was finished…there were no more perfect brackets.
In 2014, Warren Buffett offered $1 billion to anyone that picked every single game correctly.
The odds of having a perfect bracket for this year’s tournament are approximately 1 in 1.6 billion, according to statistician Nate Silver.
You might be wondering, what does this all have to do with the stock market and investing?
At OptionSIZZLE we believe that one of the best ways for everyday investors, like you and me, to create wealth from the markets is to use options.
The NCAA tournament is all or nothing. Win and you go to the next round…lose and you go home. It doesn’t matter what success you’ve had in the past…if you don’t show up and win…you’re out.
Fortunately, we’re not stuck with our investments the same way we are with our tournament bracket. You see, we’ve got freedom to enter new investments, close out ones that are not working, and hedge our bets.
Investors have many fears when trading options, such as losing all of their capital. Sure, options are time wasting assets whose valuations move a lot quicker than stocks. However, as an investor you have a lot of say in managing risk.
For example, instead of trying to make a ten percent return on all our capital, we use the leverage that options award us and….
When you’re picking a bracket for the NCAA tournament, it is locked in and you can’t change it… there’s no way you can diversify or mitigate any risk associated with your bracket, unlike how you can manage your options portfolio.
Let’s discuss a few examples:
The “best” team doesn’t always win the NCAA tournament. There is a lot of randomness involved. A key player could get in foul trouble, the other team could just get hot, the coach might not make the right adjustments, the team could be jet-lagged from traveling…whatever the case may be.
On the other hand, if you trade small, you are less vulnerable to randomness and have the ability to overcome losses…and believe me, there will be losses.
Remember, probability only means something if you’re able to do something over and over again. The tournament is a win or go home event.
There is a 50/50 chance that if we flip a coin that it will land heads. However, we could flip a coin 2 or 3 times in a row and have it land heads. Based on the small sample set, we landed on heads 100% of the time. Now, if we flipped the coin 1,000 times, then we would be closer to 50/50.
Diversifying our capital amongst various small trades is like giving ourselves a chance to see the true probability.
You must have a game plan. Every team has a checklist of what their keys to victory are…you should as well. For example, you should define how much capital you’re willing to risk, what your exit strategy is and how you plan to manage the trade, whether it’s working or not.
Don’t be afraid of risk. At some point in the game you’re going to have to make some difficult decisions… in the fact, it could mean the difference between winning and losing. If you play it too safe, you may lose. Some option investors are scared of risk…the reality is…you’ve got to respect risk, embrace it and accept it. Without risk, the opportunities to generate above average returns would not be existent.
Be prepared for surprises. Mike Tyson once said “Everyone has a plan until they get punched in the face.” In a basketball game, players could get hurt, heat up or get in a slump, foul trouble could play a factor…and a whole lot of other stuff.
The same is true with the stock market. An activist investor could move the stock price, a news story about the company, geopolitical events, CEO comments, analyst upgrades/downgrades….and a whole lot of other stuff.
Adjustments are part of the game. A team’s strength in one game may no longer be an advantage in the next game. As conditions change, it’s important to know what your strengths and weaknesses are. The same is true with your trades.
Some stocks are more expensive, which will influence the strategy to use and the amount of contracts to trade. In addition, the holding period for trades will vary depending on what your expectations are.
Bottom line, you can’t expect to trade the same underlying stock, the same way every single time. The market changes as well as opportunities. I get it, it may be difficult to filter through all the market noise when you don’t have a solid approach.
I understand that many of you are scared of trading options. You’ve probably heard horror stories of people who lost it all…maybe received margin calls that they couldn’t repay. You even may have delved into options trading, without the proper training, and lost some money.
I understand, losing sucks!
But the truth is, you’re in a lot more control than you think. It doesn’t matter if you are buying options or are a premium seller … the ball is in your court … and you define your risk. This is why OptionSIZZLE exists …showing you the ropes to options trading glory.
As option investors we can all learn a lot from the games … I get it, the NCAA tournament is thrilling to watch … but that thrill and excitement only comes once a year. Learning how to successfully trade options can provide that same thrill and excitement that you feel, all year round.
What do you think, do can you see the comparison between options trading and March Madness? If you have a better comparison, I’d love to hear it below.