“Serious, committed, and relatively successful long-term investors tend to do best when getting involved with options.”

Using Options As a Long-Term Investor

In this article, I begin to dig into why I feel this way.

One quick note — most of this applies to trading stocks as much as it does options, though the latter is the focus here at SteadyDime.

Goals of Trading and Investing

While some of this might seem obvious, it’s necessary groundwork. Whether you invest long-term or trade on a swing and or daily basis, you do it to make money.

A long-term investor tends to build his or her portfolio for retirement or one of life’s other milestones. A short-term trader uses the money in his or her account for a wide variety of reasons, ranging from life to being able to trade bigger and more often. To accomplish all of the above, you need to make winning trades, irrespective of how long you’re holding a position.

I also argue that individuals who are big into long-term investing would love to ditch their “day job” and use the stock or options markets to make a living. I’m talking about the investor who keeps his or her portfolio open and does equity research while at work. The type who watches CNBC morning, noon, and night. The person who eats, drinks, and sleeps the market.

It’s akin to the notion that if you were ever good enough to play a professional sport, you would have forsaken everything else and played a professional sport. If many long-term investors thought it was possible to live off of whatever their portfolios produce now — without risking their long-term goals — they would probably quit their jobs and focus on the market 100% of the time. To that end, many long-term investors would probably become full-time market participants, as short-term stock or options traders, if they thought it was possible.

While most people probably could never make this dream a reality, no matter how hard they tried, I’m convinced quite a few could. It’s all about opening your mind as a long-term investor and not considering trading something somebody else does. Or something too risky for the long-term investor to get into.

Mindset

It takes just about the same mindset to be a successful stock or options trader as it does a long-term investor who stands the test of time.

First and foremost, both endeavors require unwavering discipline. They require you to research and devise a rock-solid plan and stick to it.

Like the long-term investor who will never invest in a stock that doesn’t pay dividends or only invests in stocks with P/E ratios below 50. Or must hold a stock for a minimum of one year, no matter what happens. Or some combination of these and other things. You make zero exceptions. Because, if you do, you essentially have a worthless, dog and pony show system. Sure you might have made money by jumping at an attractive “exception,” but you likely lose in the long run by being erratic or undisciplined.

To me, this stuff is trading AND investing 101. (But it always bears repeating).

If you’re a long-term investor with a system you stick to, that you see through and find success with, you are already halfway to being a not-too-shabby stock or options trader.

There’s probably nothing more important in trading than researching the indicators and such you’ll trade on, testing them repeatedly, settling on them, and then sticking to them. You’re not going to execute a trade based on your gut, a news story or what somebody said on a message board. You’re going to do it because the little line on the chart ended up where you anticipated it ending up (or whatever it is you’re going to use to make buy/sell decisions).

You have to have great money management skills. To invest long-term and keep things straight in a portfolio with multiple holdings, you have to be able to manage money or, more precisely, allocate it. I’m convinced that those skills translate to managing money as a trader. Being able to manage money well inside a long-term portfolio probably will make you better at it in your trading account. There’s a chance the long-term investor might operate a bit more conservatively as a stock or options trader, which probably isn’t a bad thing.

You have to be patient. We’re talking patience at different scales, but patience nevertheless.

Building a long-term portfolio requires you to wait through seemingly boring times. It’s not easy for many of us aggressive and impatient types to hold a stock for a couple of months, let alone a few or a dozen or thirty years. Some long-term investors plan on taking some positions with them to their graves. That level of patience makes waiting an extra second or minute or even day to pull the trigger on a trade look like nothing.

One Can Benefit the Other

Practically speaking, one form of “playing the market” can benefit the other.

Many long-term investors I know savor the days when they get their hands on extra cash. Found money or some other random lump sum means they can buy more stock. If you’re a long-term investor who also trades options short-term, there’s no better place for the proceeds of a winning trade than smack dab in the middle of your stock portfolio.

Think about it. After you do whatever you need to do with your profits from a trade (e.g., pay bills, set aside money for taxes), you can religiously invest that cash. It’s the same idea as reinvesting dividends or plowing money from a winning stock investment. You decided to close into another position. You have this pathway set up between your trading account and your portfolio. It seems like the makings of a happy marriage to me.

And, of course, as a long-term investor who doubles as or turns into a short-term stock or options trader, you can do things such as sell puts or write covered calls (and other more advanced strategies) to produce returns that can benefit both accounts.

Making the Jump

People who consider trading aren’t sure how to make the jump. They’re afraid. And for a good reason. However, if you’re one of the few who can invest and or trade stocks and options for a living, you have the opportunity to make lots of money and have a good life where you answer to nobody but yourself.

Consider the ranks of long-term investors the farm team for the world of short-term stock and options traders. More serious and thoughtful market enthusiasts should consider making the jump. The similarities and what they can achieve might surprise them.