How We Trade Options: Building Wealth, Creating Income, and Reducing Risk
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Pete Najarian has an interesting and colorful background. Before beginning his career as an options trader, Najarian was a professional football player with the Tampa Bay Buccaneers and the Minnesota Vikings. Najarian was lured into options trading in part by his brother, who thought that the competitive environment of the options pits would fit well with the competitive nature Najarian had nurtured on the playing field. After only a short while, it was clear that Najarian had found a new home, thriving as an options trader, becoming a market maker and later a specialist.
Since those days, Pete Najarian has been a major player in the world of options trading and options brokerage. He was a founding member of One Chicago, an electronic exchange geared toward facilitating the trade of futures on individual stocks, indexes and exchange-traded funds.
Najarian is also the co-founder najarian brothers how we trade options Hedgehog, a trading platform for options, stock and futures traders. Here in Part 1 of our interview with Pete Najarian, we learn about how he came to be an options trader, which options strategies he prefers to use and why, as well as his thoughts on leverage and whether or not traders need to know how to trade stocks before trying to trade options.
Part 2 of our interview with Pete Najarian will be published next week, Friday Well, I actually had absolutely no financial background at all. As a matter of fact, I was a genetics and physiology major in college and then was lucky enough to play professional football.
And after several months, I decided he was right. That must have been a najarian brothers how we trade options heady experience.
It was an opportunity that I really liked. So that became another competition between yourselves and the Chicago markets against all of the rest of the exchanges across the country that were also trading options. Occasionally television folks and radio people and newspaper would look for answers to what was going on in the market.
The first week that I sat down with the guys was February of and then I was back and forth from Chicago from that time all the way through early May; and then have been living in the New York area and doing Fast Money five days najarian brothers how we trade options week with the guys since May. Is there anything from the world of professional sports that translates well into the world of either trading in general or options trading in specific?
The real answer is that professional sports are very, very similar to what you face in the markets on a daily basis. And the reason I say that is, professional sports give you an opportunity to compete and through that competition, you get knocked down. And that really is what the markets are all about. There is not a single institutional bank on Wall Street, an investment bank on Wall Street that has not had some major write-downs because of what they had done in those markets.
So I think the easiest translation I can say is that you are going to get knocked down. You are going to be wrong. So there really are a lot of similarities. In other cases, they just did very poorly and left the business. When it comes to your own trading, what are some of the main ways that you like to use options?
One would be just a straight, naked buy of a call based upon a lot of the different reasons that would put anybody into their positions. One, would be to try a spread. I would sell the option based upon the fact that the premium level is so high that if those buyers were right, I will be able to ride it with the stock and then eventually be taken out of my position with the call. So those are really some of the strategies that are probably the most frequently used.
And najarian brothers how we trade options of course, there are calendar spreads you can use, using that very, very high priced volatility that somebody has demanded for those options. Using that and to sell that and then buy a different month where the volatility has not expanded to those levels, trying to take advantage of the monstrous movement of volatility, expecting that at some point, that that volatility will contract to the normal level and I will be able to reap the rewards of the premium.
Some of these strategies or approaches that you mentioned sound relatively straightforward. How about some of these other strategies you mentioned, such as the call spreads, the owning the stock, selling the calls, the calendars. How far up the skill level ladder do we have to climb to use that kind of strategy? I think a person would need to know just some of the risk and reward of those other trades.
And by being proactive, you are being able to put into a position to put these positions on. For instance, I rarely would put on positions where I have unrealized amounts of exposure. I always want to know exactly what my exposure is. I try to limit my exposure and najarian brothers how we trade options my risk so that every single night, regardless of what were to happen, I know that I can sleep.
And for me, that gives me the ability to go home at night and be able to sleep. Do you think that if people need to trade stocks before they trade options? Or do you think that people can go straight into options? People najarian brothers how we trade options have to understand all the metrics that go into what prices an option.
In other words, you buy a stock; you basically know where the stock is and it includes the dividends and so forth. It really is the major difference between the options and the stock.
But by paying that premium, that is allowing you to do trades with leverage. I say that because when you use the expression leverage, then people often times go: Can you think of another thing or two that are also the kinds of key things that options traders really need to get their hands around? Well, you know, understanding the volatility of the options is probably as critical as anything. Under normal circumstances, an option has a price based upon past history. What traders need to understand is how much volatility is attached to the option relative to the normal volatility.
Ahead of all of this craziness that happened, there were the institutional buyers and some speculative buyers but very large paper was trading in there that I would have deemed institutional size. So traders just have to understand what the levels of volatility are because that really will tell you how much more risk you really are putting on a trade when you decide to go into the options.
And the smoke for us often times is in the options where it can be very difficult. There are plenty of examples in the last couple of years, whether they be take-overs or upgrades. You name the catalyst or in the case of some of these negatives lately in the marketplace, the smoke has been there and the smoke has been in there with the options.
The leverage of options allows people to put on just an incredible amount of exposure working towards that najarian brothers how we trade options of what they think the catalyst is going to be. Do you have an opinion of some of the popular metrics that people use to allow options to lead them?
Things like the put-call ratio? You know, everybody loves to talk about the put-call ratio. I think that it gives you some insight. People tend to treat najarian brothers how we trade options as a binary, on-off sort of thing giving specific signals… Laughter Peter Najarian: Along that line of perhaps myths about options trading, if you were going to give a table-pounding rant about one topic in options trading that drives you crazy, what might that rant be about do you think?
I often times hear people pounding about the table, the rants on volumes that end up being fairly meaningless. I mean, often times, I hear people talking about well, there was just this amazing amount of volume in the options of a particular stock.
That really is the whole trade. You see it around stocks. You talked about some of the strategies that you use and how some of them are things that certainly a beginner or maybe an advanced beginner options trader would be able to use.
Are there other strategies out there that you think that a new options trader should be aware? I know straddles are some that some najarian brothers how we trade options recommend for new options traders. My biggest issue is this; when it comes to some of the more complex strategies, when you start getting past some of the very, very simplistic trades that are out there, the more complex the trade becomes with options, the more expensive it becomes and the more you really have to be right to make any money on the trade.
There are just too many pieces of the puzzle that between the commissions and najarian brothers how we trade options overall cost, they just become almost impossible to make money unless you just were right beyond all words.
When you leave the trading floor and you see — I mean, now the trading markets in general have tightened up, I think, over years because of the competition. And the cost is high and the return continues to get lower because of the cost becoming more expensive najarian brothers how we trade options you are paying for the offers or selling the bids.
Pete Najarian as he talks about some of his most interesting trades ofhis opinion on in-the-money versus out-the-money options, exiting winning options trades and more. At Connors Research, we are using it as an overlay to najarian brothers how we trade options of our best strategies to make them even better -- now you can, too. The Connors Group, Inc.