Andy Crowder doesn't care what's going on in Europe. He tunes out things like unemployment numbers, job growth data, highly anticipated Eurozone summits, raised debt ceilings and Japanese tsunamis. The ever-churning, 24-hour financial news cycle that most investors live and die by is basically useless to Andy. "It's all noise," is his familiar refrain.
Instead, Andy's investment philosophy focuses on one strategy: options. Trading options is an investment strategy that has worked for Andy for more than 15 years. Now Andy is making options work for subscribers to his Wyatt Investment Research newsletter, Options Advantage. Since its inception in late September, Andy has earned a 16% yield for his Options Advantage subscribers. Mind you, that was during a time when the market vacillated between the extreme high of the best October for the S&P 500 in 20 years and the extreme low following the worst Thanksgiving week for stocks since 1932.
I sat down and talked with Andy about his success with options, and how he is making money for his Options Advantage subscribers. Here is my full conversation with Wyatt Investment Research's resident options guru:
Chris: Your Options Advantage trading service yielded 16% in the last three months of 2011. Explain how you were able to achieve such big returns for your readers.
Andy: This may sound oversimplified, but it was patience and discipline. Patience allows me to wait for short-term, high-probability setups to enter the market. Once a setup enters the market I use a logical, intellectual, strategic approach to take advantage of the short-term extremes that the market has presented. Basically, I allow probabilities to work for me, not against me. Almost the entire process is mechanical.
Capital preservation is also one of the key elements of the strategies I use in Options Advantage. I insist on a disciplined, risk-management approach so that my strategies will have the best chance at long-term success.
I am a realist. I realize there is no holy grail in trading. I realized long ago that the less I trade, the better my strategies will perform over the long run. And the long run is what matters. This is what makes my strategies unique and, so far, successful.
Andy: Simple. I wanted to make money for myself and others.
I became infatuated with options early on in my career. As an MBA student, I was enamored of the possibilities that options allowed. Statistically, stocks only have a 50/50 chance of success, so I could never figure out why investors/traders bypassed learning options for such a poor chance of success. It amazes me how many professional money managers out there don't know how to use options to their advantage.
With just a little effort, I was able to create a statistical chance of success on any given highly-liquid ETF or stock far better than 50%. Most self-directed investors still have a hard time grasping this idea, yet the information is out there for all of us to learn.
Chris: What options strategies have worked best for you over the years?
Andy: No doubt, my best-performing strategies and the ones I now use almost exclusively are credit spreads and high-probability, mean-reversion trades using calls and puts.
When I started my career as an options trader I quickly discovered there was no "get rich quick" scheme or foolproof method for trading options. It doesn't exist.
Over the last few years I worked toward refining several of my favorite and most successful stock options strategies. After years of trading options, I wanted to focus on the strategies that made me steady, consistent income. And while sticking with a few key options strategies is important, I also wanted to establish strategies with capital preservation goals because capital preservation is key.
Chris: 2011 was a volatile year for the markets. The S&P closed either up or down more than 2% on 35 different days. Does such volatility make options trading tougher or easier?
Andy: Volatility is a wonderful thing. When I started trading options, the first thing I was taught was to buy low and sell high. This goes for absolutely everything – including volatility – especially if you trade options.
Increased volatility – or as we say in the options world, implied volatility – means that I can sell options premium for greater prices and in turn allow my chosen position to make more money. This is a huge benefit when trading credit spreads because it not only allows for more premium, but it can also create a larger margin for error.
Most investors fear volatility. I really don't care one way or the other. I only trade extremes in the market and apply strategies with a high probability of success. In my case, I welcome increased volatility.
Chris: What do you expect from the market in 2012, and how do you plan to use that to your advantage as an options trader?
Andy: I try not to guess where the market is headed over the intermediate to long term. It is truly a fool's game. The crystal-ball approach is basically useless to investors. No one knows where the market is headed over the next year. If they say they do, then you might want to reconsider where you get your information from.
What I do know is that 2012, like every year, will present short-term extremes in the market. As always I will take advantage of these extremes by applying sound, logical options strategies. My approach is mechanical. I patiently wait for short-term extremes, apply the right strategy to fit my assumption on the extreme and then allow time decay or my directional conviction to play out. It is quite simple. My approach is always the same, whether it's 2012 or 2020.