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In the world of medicine, there are generalists and specialists. The generalists see any patient with any malady, applying a wide range of treatments. The specialists deal with a very narrow cross-section of people with similar problems, focusing exclusively on one ailment or area. As a trader, you may find it useful to identify yourself as a generalist or a specialist? Do you have a broad scope of vision, focusing on a widely diversified range of stocks, or do you deal specifically within a particular sector? There are pros and cons to each style.

The stock generalists have the advantage of sector rotation, so that when money is coming out of their tech stocks, for instance, it may be going into the old-line "safe haven" stocks that make up the Dow 30 (which they also may own). Their risks are reduced, as are their chances of a major breakout to the upside. Specialists have the potential to achieve staggering results when their sector is on fire, as well as take severe losses when money rotates out. Examples include telecommunications, pharmaceuticals, biotech, retailing, etc.

Options traders have some additional choices that stock traders don't. In addition to the opportunity to be a generalist across the market or focus on a narrow segment, options traders have more than 30 different types of strategies that can be applied to either the entire market, or to a very narrow band of stocks. This then raises the questions, "Should I try to apply all options strategies across all stocks? Or one particular option strategy across all stocks? Or all options strategies across a very narrow band of stocks?"

The answer has much to do with the kind of reward/risk profile you are comfortable living with. Suppose you're a very aggressive trader who likes to win big and can handle losing big, too. You might do well to pick some of the most explosively volatile sectors and trade them directionally, on the edge of your seat, with straight options or spreads using short time frames. This is a medium-width strategy using the full arsenal of options choices. Personally, I don't recommend this approach-it has too high a Pepto Bismol factor for my liking. Yet, I know traders who do well trading this way since this suits their need for "the rush."

Other traders, some of whom I know well, only trade one or two stocks and get to know their gyrations so well that they can apply directional strategies and make quite a nice living doing so. They know the support and resistance levels of the stock, the behavior of the stock around its earnings and the earnings of its competitors, and specialize in a few options strategies on maybe just two stocks. Call it the specialist-specialist approach if you will.

Another trading method, to which I've been giving serious consideration for the market we're in, is to be an options generalist across a very specific club of just two or three stocks. Like the specialist-specialist I mentioned above, I would get to know everything about how and why the stock moves and then apply all strategies to the stocks to hedge risk and maximize reward. Call it the specialist-generalist approach!

Yet another idea that I've been developing, born from the pain of recent market decimation (not decimalization!), is to be an options generalist across the indexes. This would include, of course, the OEX ($OEX), SPX ($SPX), and, in particular, the Nasdaq 100 Security QQQ (QQQ), which is akin to trading the Nasdaq at an approximate 1/42^nd ratio. Why am I considering these? Because they have no earnings, no upgrades, no downgrades, no merger or acquisition risk, and offer diversification within a single entity! Sure, no explosive breakouts, but they don't have analysts following them and issuing devastating overnight downgrades, either [witness Emulex (EMLX) this past week].

With the risk (spelled F-E-A-R) of overnight collapse out of the way, the task at hand, then, is to determine how to use the wide array of options strategies to create trades that match your short-term, intermediate-term, and long-term expectations. Most of us find gauging where the market might be in a year easier than gauging where an individual stock might end up. Six months ago, telecom was white hot; now it's ice cold. Where will it be in January, 2002? If you had to bet, would you feel more comfortable betting on the S&P 500, Nasdaq or Dow, versus an individual stock that has 4 earnings cycles to survive between now and next January?

Back in March of last year, I had approximately 40 technology positions in my portfolio. Tom Gentile saw my list and half-kidded that I could have saved myself a boatload of commissions by just trading the QQQ! I didn't quite get it at the time, but I never forgot his comment. I'm now almost a year smarter and have studied hundreds of stocks as well as all of the Optionetics advanced strategies since that time. Certainly, I clearly see the case to be made for tempering risk by narrowing the focus of stocks and creating multiple option trades all the way up and down the price curve of the stock or index.

Getting back to the question of whether to be a generalist or specialist, the answer lies within you, in your trading style, and in your ability and interest in watching the markets everyday. As long as you understand the choices that await you, you'll eventually settle into the style that works best for you.

As always, happy and safe trading!

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Recent Articles by Ed Hecht, Optionetics.com

• April 9, 2001
  Riding the (Elliott) Wave to Profits
• February 23, 2001
  Being Assigned is Not the End of the World
• February 14, 2001
  The Generalist vs. the Specialist
• January 31, 2001
  Activating a Game Plan for the New Year
• January 17, 2001
  Lessons Learned the Hard Way Thanks to Last Year's Bears