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Options trading can be tough but they can give investors' strategies an edge. At least, that has been the case for Market Rebellion co-founder and CNBC contributor Jon Najarian.
Najarian has been trading options for nearly four decades, managing his own money as well as that of giants such as Goldman Sachs. Najarian recently sat down with CNBC and spoke about how he got started trading options, his worst trade in the business and where he sees opportunity.
Here are 7Qs for Najarian:
"I started in 1981, so this is my 38th year. I was playing football for the Chicago Bears. Played for four games, got cut and went down to the trading floor because I loved Chicago. I had never been to Chicago before, but after being there for however many weeks during training camp and playing for the Bears, I loved it. So when my agent offered me a chance to go down to the trading floor and learn how to trade, I said sure. For about three months, I hated it because I didn't understand it. I knew stocks, but I didn't know options. That was a pain in the butt. I was very unhappy even though I loved Chicago because I didn't understand what was going on. Finally, after three months, it clicked."
"You can define how much risk you take. That's one of the big pluses. In other words, if I buy an option for $1, that's all I can lose. Whereas if I buy a $70 stock I could lose $70. The other is you can leverage up. By leveraging I mean, for maybe 5% or 10% of the cost of owning the stock, you can control the stock with options. That's why they're so popular."
"We're using an algorithm that, through all the millions of trades per minute that go off, it finds where the big blocks of options are trading. Then we focus on those stocks. There are so many quotes coming from the floor because of high-frequency trading and so forth, it would be impossible to see it with the naked eye. You could see volume, but you wouldn't know if it was bought or sold. It's really important to know the difference … the fact that we can do that with our algorithm is our edge."
"Cannabis stocks are trading a lot like cryptocurrency was a year ago. Cryptocurrency had a big boom in 2017. You saw it run up from $1,000 per coin to $19,000 and then it crashed the next year. Cannabis stocks are doing that right now in 2019. They've been crashing for the last seven or eight months. They're probably down 60% or 70% from their highs. What does that mean? That means in my mind you'll see tax-loss selling into the end of the year. If I've got a loss in a stock, whether it's a cannabis stock or not, I can close that position, realize that loss and match it up against gains and not pay taxes. That's going to hold those stocks back, which is why I think they will do well in 2020 ... "We're also seeing a lot of good speculation into Black Friday in some retailers such as Target, Kohl's. I imagine Walmart and Amazon will do well, too. Mastercard and Visa, a lot of people are betting those will do well too because Americans have a little more money to spend."
"They have to have discipline and you have to have discipline in trading both to take losses and to take profits. A lot of people can do one but not the other. Some people can take profits, but they can't cut losses. Other people can cut losses but they don't pull profits off the table when they've got winners."
"Worst trade for me was on my birthday. When I turned 29, one of our traders lost a couple million dollars of my money. It was the worst and the best thing because it made us focus on why we lost the money because you always try to learn from this. We lost the money because 10 minutes before the close, somebody came into the pits that we were specialists in options and started buying puts like crazy. If somebody is doing something at the end of the day — which sometimes the do — they usually know something. They think earnings are going to be better, or there will be some news breaking after the bell. You never want to be on the other side of that trade. So they came in buying a ton of these puts, which is a downside bet, on a medical device company. The company came out with good earnings, but guided horribly and the stock traded down like 30%. We lost millions on that, but what it did is it made us ask the question: if you're coming home long or short, are you doing so because you want to? Because you think it's going to be up or down tomorrow? If that's the case, that's OK, but don't let somebody make you long or short."
"We were expanding the number of things we were going to be offering and we thought Investitute sounded too much like an institute, which obviously was intended too. But as we all the sudden started offering a room for unusual option activity and next to it a room for technical analysis and another one for futures and another for crypto, we were going to have things people could subscribe to and say 'Boy, I wish I had someone point me in the right direction?' That's what we do in those rooms. They're moderated. People can talk back and forth with the people that are moderating them. So we said, 'you know what, we're more like rebels' … so we rebranded ourselves as Market Rebellion. Knock on wood, it's going well so far. People seem to like the rebel part of it."