James Schultz is a derivatives trader, options trading expert, show host, and content producer for the tastytrade network, as well as the CEO and founder of F Cubed.
He spoke at the San Francisco MoneyShow, a business conference that gives audience members insight into financial markets and the world of investing. During an August 2018 MoneyShow presentation, “Undefined Risk: Embracing the Unknown,” Schultz granted an interview and shared information on options trading and investing.
James’ expertise is invaluable for readers looking to learn more about options trading and to improve their personal portfolio. Schultz offered the following responses to options-related questions.
1. What is your best advice for an investor starting out in options trading?
“Start very small and focus exclusively on defined-risk strategies, until you’re comfortable with how the market moves and your options positions bounce around. While a virtual, “paper” money account is useful for learning the mechanics, it cannot and does not simulate the actual emotions that are felt with real, live trading. So, even if it’s only a small amount of money, start with small trades in a real money account, as soon as you can.”
2. What is your favorite options trading strategy? What are the major risks associated with this strategy and how do you minimize those risks?
“My favorite strategy is the Ratio Spread (Buy 1 at-the-money (ATM) Option + Sell 2 OTM Options), especially on the put side. With this strategy, you’re able to profit if the market goes up, goes nowhere, or even if it goes down slightly (which actually ends up being your most profitable outcome). All of your risk in this trade is to the downside, though, as a move significantly below your Short Put strike will result in losses. Still, even if this happens, you can always close out of your fully in-the-money (ITM) Long Put Spread and manage that extra Short Put separately moving forward – to control risk and minimize the damage. I’ve done a handful of segments on the Ratio Spread on my show, From Theory to Practice, on the tastytrade network.”
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3. What is your current day-to-day role with options? Do you favor option trading over stock trading?
“I currently trade options very actively, every day. I think that options offer investors a strategic component to investing that stocks cannot match. I do, however, respect the fact that some investors might not want to actively trade options every day. Still, I think a more conservative strategy, like a simple Covered Call, offers too many statistical advantages to be ignored, all while reducing risk in the position.”
4. How did you first become involved in options? What was your background that led you to that point?
“I started trading options while I was working on my Ph.D., and I was intrigued by the opportunities that existed in the options world, while I was learning about the Black-Scholes Option Pricing Model. The simple fact that the only unknown variable in the model, the implied volatility, was consistently higher than the realized volatility that actually unfolded in the market left me convinced that there was an opportunity in trading options.”
5. Is there anything else you want our readers to know?
“Trading and investing is a lifelong process – never stop learning, growing and polishing your craft. Even if that craft is simply buying index funds to play the long-term trend in the market, there are always things you can add or subtract from your understanding to improve your skill. Along that path, too, employ self-awareness. I wholeheartedly believe that the potential returns in active trading exceed that of passive investing, but that approach to investing might not jive with your personal style or temperament. However, the only way to know this is try for yourself.”
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Additional guidance from Schultz is available at the tastytrade network, or on F Cubed, which he started to help people with their fitness, finances and faith. Also consider watching his YouTube channel and listening to his podcast.