Investing Truths: Ask Orion About Options And He'll Give You His Opinion

Ask Orion S. about trading options and you can bet he'll have an opinion. Why? Because for him, having an opinion is the key to options trading.

"Options let you express a view. You can take a view of the market and potentially get paid for correct opinions," Orion says.

Orion, an RBC employee, has been trading options for about 10 years. He considers himself a growth investor overall, but has money spread across conservative, growth, and income assets, plus some in speculative assets.

On Getting Started

His first foray into options trading goes back to his days as a new university graduate. With a math degree in hand and an uncertainty about what to do next, a Canadian Securities Institute Course piqued his interest in a financial product he'd never heard of.

While it was the theory behind options that initially sparked Orion's interest, he became more fascinated as he honed his skills using a practice account. Documenting how his ideas would play out in reality helped him begin to understand the nuances of options trading. "You start to see things that make you go 'huh?' The stock is up, I thought it was going to go down."

Investors choose options as part of their investing strategy for various reasons. They can be used to try to cut losses, protect gains, earn income and can offer exposure to the price movements of a stock without actually owning the security.

On Beliefs

For Orion, options allow him to reconcile his short-term beliefs with his long-term views of his investments.

"I fundamentally believe buying and holding is a proven strategy. But occasionally, I have really strong short-term views about the market that conflict with my long-term beliefs. Options allow me to do something about that short-term belief, while still holding that long-term view," he says.

On Speculating and Hedging

Orion uses options for two reasons: to speculate and to hedge.

"The first time I used options was for speculation. For a $50 stock, I didn't have to put down all $50. I could put down $5. That's how I first got started. I got cleaned. The fact that I lost sounds bad, but I would have lost way more if I'd bought the stock," he says.

He'll also often use options to hedge against a fall in the price of a stock he owns. Typically, he'll have an opinion on the direction of a stock price, research options and take action.

"I generally think about it when markets are up rather than down," he says. Orion likes to get a feel for a stock's price himself by monitoring its behavioural patterns using charts, technical analysis and his gut instinct. "There's a big difference with having an idea and having a good idea. With options, you want to wait for the windows of opportunity."

On His Thought Process

Orion will never trade an option just for the sake of trading an option.

"I start with the strategic need for my portfolio and work backwards to see how options can enable that," he says, adding that he never starts with, "I want to trade an option."

Orion carves out a portion of his account for options trading; he doesn't risk his entire portfolio.

"Options are a strategic tool, not a strategy itself. They allow you to 'tilt' your portfolio. A portfolio of options themselves can be very dangerous," he says.

On Timing

Timing is a key factor in Orion's decisions when it comes to options. "You can be dead right on the direction of a strategy, but dead wrong on the timing." He says he doesn't feel the need to watch his screens moment-to-moment for options, but generally picks options with 45 to 90 day expiry dates, which he feels is enough time for his strategy to play out.

According to Orion, you don't have to be a mathematician to succeed with options. He largely lets the market do the math for him. In other words, he's comfortable depending on markets to price securities quickly and efficiently. He also turns to technical analysis, saying chart patterns can provide useful insights.

On Challenges

So what does Orion find most challenging? Two things, really. First, narrowing his choices down since “there are so many ideas that seem fun and exciting." Second, he cautions that it can be easy to over-trade with options. "It can be too easy to say, hey, I've got some money sitting around…" Rather, he reiterates the importance of starting with the need in a portfolio and working back from there.

Many investors would likely says that some of their investing decisions have kept them up at night. Did I make the right call? Should I sell? Should I buy? When it comes to options, nerves don't get in Orion's way.

"I wouldn't do something that was keeping me up at night. If it was, I would know I would need to be doing something different," he says.

Like any investment, there are risks that come with trading options. They're also generally considered a more complex, advanced investing strategy. Find out more in our Options Trading Guide in the Investing Academy.