The Right Way To Trade Options

Randy Frederick says that people probably use to think that options traders were always speculating, taking a lot of big risks and putting a lot of money down waiting for big gambles to pay off.

Frederick is the managing director for trading and derivatives at Charles Schwab. He recently joined Benzinga’s #PreMarket Prep to talk about the two different types of options traders and why they need each other for the market to work.

"There will probably always be people in the derivatives markets that are speculators, but the reality is that the primary reason derivatives, especially listed options -- my area of expertise -- were created specifically for the purposes of hedging and generating income and largely," Frederick said.

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What Makes Markets Work

He said that having both types of traders is a good thing. While the hedgers are willing to spend a little money to get rid of risk, Frederick explained, the speculators want to spend money to buy risk.

"So when you have people who want to buy risk and people who want to sell it, that's what creates the markets," he said.

Although the market needs both types of traders to work, Frederick said that he hasn't met too many people who speculated on a regular basis and had long-term success.

Hit Singles, Not Home Runs

Those that do well over the long haul are people who use options for hedging to reduce the risk of their equity portfolio, he said, as well as generating income so that they can make money when the markets are going sideways.

"What they're really doing is they’re not trying to hit home runs. They're trying to hit singles, and they know that adds up over time," he said.

Frederick also talked about covered calls and enhancements to the Charles Schwab options platform.

Check out his full interview here:

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