Educating beginners: Where to start

Education is an absolute necessity for traders and investors. However, deciding where to begin and what to include in the course of study is not so obvious.

Assume you encounter someone who had never paid attention to the markets, but who comes to you seeking guidance. This may be a young person in his or her first job and has some spare cash for the first time. Or it may be someone who just realized that at age 50 it was past time to get started saving for retirement. Do you know what you would tell that person to do, or suggest how to get started?

The reason behind today’s post is that I recently read a post written by one of my favorite bloggers. The advice given probably seems reasonable to many. But I felt the advice was very far removed from my reality, and that the entire topic deserves closer scrutiny.


1) The advice that bothered me came from a recent post and suggested a new trader be given a crash course in technical analysis, with the goal being to learn to read charts and recognize specific patterns. I know that technicians can be very successful traders and that some have a special talent for reading charts and discerning something likely to occur. However, this is a difficult field of study, and there is no reason to believe that someone who is completely new to trading would have he slightest understanding of how to comprehend the data that goes into the chart and would have zero chance to understand the final charts.

Despite the success stories, some people use charts – yet continue to lose money. It’s not the fault of the charts. Rather it’s the expectation that using charts makes trading simple.

2) I found the following bit of advice in a 2006 blog post:

All investors share the same goal. They want to get more money out of their investment than they put into it…investors have to decide how much risk they are willing to take and for how long.

One choice for people who want a low-risk investment is the money market…

This writer took the stance that the complete novice wants to know how to put money into a low-yield money market fund (Yields were higher five years ago than they are today). Would anyone really offer a brief description of a money market fund, stock, or bond – and then expect the new investor to make an investment decision based on that information? To me that is insulting to the person asking the question and also shows a lot of ignorance on the part of the person making the recommendation.

3) I truly understand that there are numerous paths for the new investor, but the only one that makes sense to me is to invest any cash destined for the stock market into low fee index funds. It may be even better to avoid the stock market completely.

I’d love to say that a professional financial planner is the correct path, but found that too many depend on modern portfolio theory and the idea of diversification to take care of risk. That may have been a reasonable approach last century, but it is a rather naive stance today.

4) I believe that the best advice would be to bank the money and spend some time reading. I do understand that some beginner books are no better than trash, but there are volumes from which a patient reader can garner some useful advice. The truth is that this is a difficult undertaking. I’m thrilled that no one has ever asked that question of me.

I believe it is easier to tell investors what NOT to do, rather than what to do. Of course that does nothing to solve the problems of the person asking the question. For example:

a) Don’t buy front-end load mutual funds. [Don’t buy mutual funds is even better advice]


Never invest in something you don’t understand. You need to be able to explain how an asset generates a profit, preferably in one or two short sentences. If you can’t, you are gambling, not investing.

This quote, or something very similar has been uttered by many well known investor types. And it makes perfect sense. Still it does not tell the investor what to do with the cash on hand.

Does anyone have a great suggestion for the person who knows nothing of stocks, bonds, or other investment choices, yet is in position to make the very first investment of his/her life? Where would you send that person and what should he/she try to learn.


29 Responses to Educating beginners: Where to start

  1. Dmitry 04/14/2011 at 7:14 AM #

    I guess the only 2 possible suggestions would be
    1) read a number of books that helped you (assuming you have any success). Because the intention of a suggestion is to make the new investor learn himself.
    2) prepare to lose money anyway. any step to any market is a fight vs. professionals, and maybe even more important its a fight vs. yourself (btw that`s why i dont beleive in papertrading usefulness – no emotions involved).

    I beleive the only way to succeed is by trial & error. You can explain the person how do you make money on stocks for ex. The person follows your method and suddenly discovers what fear & greed is. And he loses, your great trading approach which works for you doesnt work for him. Since everyone is different and have their own psychology, complexes and pain levels there is no possible universal sugestion. So the way I see it: one should be willing to learn and pay high prices for those lessons while learning himself and selecting an investment approach that suits him best. So from this perspective losing money is good: its just a price you pay for those lessons (if you take any lessons of course).

    • Mark D Wolfinger 04/14/2011 at 8:24 AM #


      I like your ideas in principle. The only problem is deciding where to get those ‘lessons.’
      It has to be true education and not some some scoundrel making false promises and offering simplistic advice.


      • Dmitry 04/14/2011 at 8:50 AM #

        Well if the person is interested in investing/trading, the lessons will come themselfs, the market is the teacher here. I can only use myself as an example: I was trying different approaches for ~6 years, which included some forex gambling, writing trade robots, daytrading futures and stocks, swing trading, options.. Basicaly I lost money in every possible way, but i dont regret a single loss: they all teached me something a) of markets I was in; b) of my nature.

        I still think that it doesnt matter how to earn money – which way to use – as long as investor is comfortable with it. And I see no way to find that comfort zone without trying.

        • Mark D Wolfinger 04/14/2011 at 9:16 AM #


          Yes, comfort zone comes with making the attempt to trade. However, not everyone can afford to take losses while learning. That can be a big problem – with no easy solution. Practice trading works for some people, but not for others. And I understand why it does not work for you.

          I admire your path. You discovered who you are as a trader. That’s good for your future.


  2. Dimitris 04/14/2011 at 8:06 AM #


    1. A person who knows nothing of stocks is NOT in position to make an investment in stocks. He has to keep his money in the bank and start reading.

    2. To my opinion, the best book, by far, about stock investing is “The intelligent Investor” by Ben Graham (the latest version with commentary by Jason Zweig). Someone has to read it many times. But reading is not enough. Investing in stocks is an art rather than science.

    3. It is also very important for someone to know that the stock market moves in cycles (secular bulls and secular bears). Each cycle lasts, on average, 17-20 years. Before he invests in the stock market he has to know where in the cycle the market is. Today, for example, we are in the middle of the secular bear that started in 2000 and will probably last until 2020. No secular bear has finished in the past with the market P/E higher than 9-10. This means that we will see market P/E below 10 before the next secular bull starts.

    4. Therefore, if a new investor invests in an index fund today, most probably he will finish this decade with less money in his account.

    5. With all above in mind and provided that:

    a. the new investor will only invest money that he will not need in case e.g. he loses his job or he has a serious illness etc., and
    b. he has the patience and self-discipline to see the market going down or sideways for the next 10 years without panicking

    the advice I would give is to invest in good quality companies that pay a growing dividend and have done so without interruption for the last 20+ years. There are companies such as S&P “dividend aristocrats” or “dividend champions” that have grown consistently their dividends for a long time.

    The idea is to re-invest the dividends each year for a period of 10, 15, 20 years or more. The fact that these are good companies does NOT mean that they can not go down by 30, 40, 50% or more. But this a good thing for someone who does not need the invested capital and has the ability to stay calm in such conditions. It is good because it means that the re-invested dividends buy more shares. So, even if the stock price does not move or goes down for the next 10 years, the number of shares owned INCREASES and therefore the invested capital increases even in a secular bear market.

    In a secular BULL market anyone can invest in an index fund and make money.

    I’ve been investing in the stock market since 1993 and managed to lose money in the first ten years trying various ways to invest. Since 2003, I am following the dividend investing method I described above and growing my account consistently.

    I hope that this helps.

    • Mark D Wolfinger 04/14/2011 at 8:28 AM #


      Good advice. Sensible advice.

      Must also convince newbie that investing is difficult, requires work, and that instant gratification is not the goal.

      Thank you

  3. Tiger 04/14/2011 at 9:18 AM #

    I have two kinds of suggestions. For the novice that does not want to spend a lot of time learning, I suggest the Vanguard way and a book or two about the benefits of low cost indexing and asset allocation. Yes, there are signficant risks with that method, but they will do better than 80% of other novices by choosing that road.

    For the person that wants to get into it, that wants to spend a lot of time learning, a lot of time trading, I would suggest some books starting with Market Wizards, to describe a wide variety of styles, How to Make Money in Stocks, to describe a single system, and a book on technical analysis as a primer on charts.

    I always tell novice would-be traders that there are a 1000 ways to make money in the stock market. One key is to find one that fits their particular personality in terms of risk tolerance, time required, effort required.

    Options are not for everyone. For folks that like complexity and like to hedge, options are good tools. For folks that are only looking for more leverage, only about 10% of those will be winners over time. About the worst thing that can happen to a novice using options for leverage is to win the first few trades. They will conclude it is an easy game, when the odds are stacked against them.

    • Mark D Wolfinger 04/14/2011 at 10:16 AM #


      Agree completely that the novice who buys options and has a few early wins – especially when they are doubles, is off to a very bad start. His/her expectations will never be met.

      Agree that options are not for everyone.

      If investors wants to be in the stock market, I also believe that low cost indexing is a great way to go. The only question is how does this novice know whether to be in the markets. For most, there is no real alternative – at least not at that stage of the learning curve.

      Where we disagree is on the merits of teaching TA to a novice. I believe there is zero chance for anyone to grasp the complexities at that point in time. You obviously know that charts, TA and systems are for traders. In my opinion, it’s a better idea to begin as an investor.

      I appreciate both your comments and your blog.

      • Wayne 04/14/2011 at 11:49 AM #

        Hi Mark & everyone,
        I’ve traded in options a few years now and gained some experience with various strategies, adjustment, protection methods.
        What do you think about transferring my IRA from index investing that I have (you know one of those target retirement funds) into investing through options?
        I know we’ve spoken quite extensively on the benefits of using options. But then when it comes to retirement investing (for me it is about 30 years away) do you think it’d still be a wise idea to use options, as compared to what I am doing with a traditional index, diversified target retirement type of investment? If I take my money out of the traditional method, I’ll lose the power of compounding?
        Thank you.

        • Steve B 04/14/2011 at 12:00 PM #

          I am just taking a swag here, but I wouldn’t take the money out of the IRA. Having all of your eggs in one basket is not a good idea. However, and many of my teachers have said this, you can use options to hedge your IRA i.e. buying puts/selling calls against the funds/stocks you own in your IRA.

          Again, just my $.02.

          • Mark D Wolfinger 04/14/2011 at 12:24 PM #

            Steve B,

            That advice is worth at least 3 cents.
            The difficult part is to remember risk, and not believe that options trading leads to riches for everyone.


        • Mark D Wolfinger 04/14/2011 at 12:10 PM #


          1) I’m not a fan of target funds, but I have no problems with investing in low fee indexes. Check our your fund’s track record.

          2) You would not lose the power of compounding (you can use options in your IRA account), but you do NOT want to place all your eggs into the options trading basket. No matter how conservatively you trade, there is almost always the possibility of a gigantic loss.

          If you do well with options, you can take some of the proceeds and add to your retirement savings (assuming you are not contributing the maximum every year). Or you could also open a Roth IRA (which I love compared with regular IRAs – especially for someone as young as you are).
          traded that way.

          3) the worth thing that can happen is for you to do so well with options that you want all your money traded that way. You have lots of time and you can take a far less risky path. Devote as much to options as you see fit, but I would keep retirement funds away. If you have the ability to adopt ONLY the most conservative methods and use only a portion of your IRA, then MAYBE options can be a part of the IRA. Otherwise, safety first. At least,that’s my recommendation.

          • Wayne 04/15/2011 at 12:19 AM #

            Yes, the possibility of a gigantic loss is very very real. Then what about a collar for the retirement account. As Steve said (2 posts up), “you can use options to hedge your IRA i.e. buying puts/selling calls against the funds/stocks you own in your IRA”. Buying puts & selling calls–that’s exactly a collar!

          • Mark D Wolfinger 04/15/2011 at 8:28 AM #


            Yes it’s a collar. And collars is what he was discussing. But someone (X) suggested selling an OTM put as an add-on to the collar. IMHO that kills the collar and is merely the sale of a naked put. Not a smart more for a retirement, or any other, account.

            If you are going to trade collars – and I do like the strategy for conservative folks, then trade the synthetic equivalent and save yourself complexity and commission dollars: Sell a put spread, or buy a call spread. If you use the same strikes as you would have used in the collar, then it’s the equivalent position.

  4. Steve B 04/14/2011 at 11:55 AM #

    Some great posts all.

    I guess before I could answer the question to the novice trader I would have to ask them a question… “Are you wanting to invest and manage your own money or looking for someone else to do it for you?”

    If they want to manage their own, I think you need to assume they know nothing about why a market moves, what causes a market to move, what a bear market or bull market is… and you have to start from the beginning. Telling someone secular bear markets last for 20 years and we are in one until 2020 is pretty useless if they have no idea what a bear market is or what causes one or how to tell when we are out of one. I am a firm believer that if I don’t know how the system works and what it is supposed to do, I won’t know when the system is trying to tell me something or more importantly, when the system may be wrong. TA is worthless if you don’t know what you are looking for or what it means. So is P/E ratios and fundamental analysis for that matter.

    I would tell them first, watch TV, read articles, do whatever you can to engage yourself in the market to learn the market as a whole.

    I am of the belief that paper trading is an excellent way to start. Dmitri, I understand the lack of emotion, but personally, that is what I want. To a T, almost all of the successful investors say you have to trade w/o emotion. Emotion leads to hanging on to losers and cutting winners short. Some people can’t do it paper trading because it is fake money, and it is definitely a personal thing. But I don’t want an emotional trader nor do I want to be an emotional trader.

    Market Wizards was mentioned above, I am reading The New Market Wizards right now, great book. One question Schwager asks of every trader, is what is a trade they remember and why and they can all tell you legitimate reasons why they made a huge winning trade. Some look at charts, some looked at ratios, but they all knew the reasons behind the charts and the ratios as to why the investment was a good one. Whether it was the effect a foreign govt’s election would have on currency or a terribly undervalued company in an undervalued sector, they had the knowledge behind the TA and FA to make the trade.

    • Mark D Wolfinger 04/14/2011 at 12:23 PM #

      Steve B,

      I’m on your side. But I am going to play contrarian and curmudgeon (the latter is a natural role for me).

      Watch TV? Is there really even one show that you recommend, other than straight business news on a politically neutral channel?

      Agree with the reading/learning. There is so much material that finding something worthwhile is not easy.

      Paper trading is good for someone who has an idea of what he/she wants to do. Our novice knows not what or when or why to buy/sell. It’s fine to practice when that practice makes you improve your performance. What performance are we trying to improve? Usually it’s learning to make more (or lose less) money. Here the novice is not practicing anything becasue he/she does not understand the reason for making any trades. There is no ‘skill’ to develop when you don’t understand what you are practicing. To me, getting started means investing. At least a person can find reasons why it looks to be a good idea to own a small portion of a specific company, sector, or entire stock market.

      About Schwager’s question: I don’t think there is much value in it, unless he is certain that the trader did not make other trades with similar setups that fizzled. We all have home runs. We all have good wins. But does any of us (I’ve done it) talk about the losses? I’d want to know the trade that the interviewee remembers because of what went wrong and what could (not in retrospect, but at the time) have logically been done to prevent the catastrophe. To me that’s a learning experience. I think a book of those trades would be more valuable. Don’t know if the public would buy it. Success is what they cherish.

      But regardless of the trades chosen, how can a complete novice learn anything when even the terminology is unknown. This is a much more difficult task than imagined.

      Thanks for the contribution

      • Steve B 04/14/2011 at 12:32 PM #

        Thanks Mark,

        Actually, he asks those questions too, meanings asking the traders about multi-million dollar losses and why they lost, so he asks both sides of the story. Regardless of the win or loss, the traders know why the trade went wrong or right. And it is never “I guessed wrong or I guessed right.”

        I don’t know if there is one show, I was just meaning things like Bloomberg TV etc.., if for no other reason than to learn the vocabularly. Because you are right, there is so much info now, it is hard to tell what is good what isn’t.

        I am just wired to know why something works or doesn’t work. I want to know that. I hate the feeling of being helpless because all someone taught me was to push a button and I have no idea what to do when the button breaks. So to speak.

        Thanks again for all the great feedback and comments you make. This is a great learning tool for traders of all levels.

        • Mark D Wolfinger 04/14/2011 at 12:37 PM #

          Steve B,

          I did not remember that part. Thanks for the correction.

          You know, I was also thinking Bloomberg TV may be a good place to begin to gather news tidbits.

          Thank you Steve.

          • Steve B 04/14/2011 at 12:42 PM #

            I don’t know if he asked every trader that question, but it seems like a lot of the traders he asks where on the wrong side crash in 1987. So yeah, I totally agree, only focusing on winning trades is not helpful at all for any insight.

  5. Garth 04/14/2011 at 5:24 PM #

    My advice to anyone new is to find a reputable newsletter service with an advisor that trades their advice, and has a long record with their current strategy. I then usually follow up with someone that I personally know to be reputable.

    I also advise that the newsletter service MUST fit the persons personality, or there’s no way they are going to trust the system through it’s draw downs.

    Finding a broker, learning to place trades, experiencing fear and greed, and developing the courage to continue trading after a loss, are big enough lessons to learn without the complexity of developing a strategy by yourself.

    • Mark D Wolfinger 04/14/2011 at 7:31 PM #

      Hello Garth,

      When you first posted a comment you had some exciting ideas. I was so pleased to read them. Today is a different story. I know we all have different vantage points and opinions. I am amazed by the variety of suggestions that have been posted, but I must tell you that suggesting that a someone actually pay for specific stock-trading advice goes well beyond my expectations. Why would anyone do that?

      Surely the goal is not to find someone to trust and essentially hand them your money to trade. And it’s worse than that with a newsletter. How is this novice going to understand the comments and trade suggestions, especially all the jargon that goes along with them? You really want this person to make his/her own trades based on the newsletter? Chances are that something would go wrong in the translation or in making the trades. Remember you are talking about someone who knows zero about the stock market.

      And worst of all, this newsletter writer doesn’t know his customers and has no clue what is or isn’t suitable for them. And you don’t seem to care about that either. You want someone with a winning track record and a good reputation to tell our novice what to do. A good reputation for what? Making money? Having integrity?

      And why would our novice have to find a broker, learn to place trades, worry about emotions etc. As much as I hate mutual funds, isn’t it better for the complete novice to let someone else handle the money? An index fund manager for example? Then while our novice is learning about the markets over the next few years, at least he/she would not have to be concerned with the intricacies of entering orders – even if he were told what to do by your newsletter writer.

      How is the newcomer going to determine whether the newsletter suits his/her individual personality? The new trader has no idea what his personality is or that of the newsletter writer. I find the common theme among all the suggestions is that this newbie can make rational decisions, despite no knowledge of the topic.

      The newbie probably has no idea that newsletters exist and would have no reasonable chance to find one with integrity. Here’s another quibble. I don’t believe ANY newsletter can consistently outperform. I believe that anyone who has that ability would be trading and not selling advice.

      Perhaps I am too negative. But everyone seems to be granting the newcomer the ability to make reasonable decisions – when I believe that person is capable of nothing – except getting more and more confused.

      Garth – thanks for the contribution.

  6. Garth 04/14/2011 at 10:09 PM #

    Hi Mark,

    It’s OK that we disagree on this stance. We both might learn something from the exchange, and even if it’s only me that learns something, well that’s OK too 🙂

    To the complete newbie who is a friend I would offer mentorship, but not hand-holding. For what ever reason, I DO get asked this question several times per year. I usually start with this question:

    “Pretend you’ve just inherited $10,000. What do you do with it?”

    Their response is a powerful indicator of their spending priorities and whether they even have the psychological fortitude to save, let alone invest, let alone trade. Most people spend their mythical $10,000 on a holiday, and thus fail the first test. I recommend a few books, which they won’t read, and the conversation doesn’t come up ever again.

    I personally don’t believe anyone should invest in the market with less than $10k, and I don’t recommend mutual funds, or even index funds for most people, because typically funds do poorly in bear markets. Saving that first $10k will be a massive act of personal will for most people and fighting the emotional itch to spend it is lesson enough.

    Whilst their saving their $10k I’d recommend books and send them off to educators that I personally trust. Books are cheap, and the good educators are generally affordable.

    After a while they’ve got their $10k, they’ve read a few books and can speak the language. Now I want them to watch a professional trader and follow in his/her footsteps. The newsletter service that I personally recommend is with someone I personally know and trust, have made money with, is accredited within the industry, did extremely well during the GFC (which I feel is a key indicator), and has a mathematical expectancy which is backed up with personal trading records. Since they’re using a system which I KNOW has a positive expectancy, I want them to get used to practicing money management and watching their personal psychology whilst trading.

    I then recommend a broker and help them through learning the broking platform, which is a massive undertaking in itself.

    If the prospective student STILL wants to trade for themselves I can offer continued education recommendations and teach my own simple positive expectancy models until the student is ready to come up with the ideas that fit their own personality.

    In short, my personal viewpoint is the business of trading is too massive to undertake all at once. I want to separate money management, methodology, and psychology as much as possible into their own lessons, each of which can take years.

    • Mark D Wolfinger 04/14/2011 at 11:14 PM #


      I love your test question. It’s amazing but otherwise sane people are psychologically predisposed to spending a windfall, whereas if that same person were to get an $800/month raise (after taxes), the money would not be so hastily spent. I have no understanding of why this is true. One possibility is that the person you are asking is replying to a question and not facing the decision in real life. On the other hand, it is common for lottery winners quickly to go broke, so perhaps that is the way people react to extra money.

      I also agree with your summation paragraph. The business of trading is massive and complex. And one thing you did not mention is that it requires a specific skill set. And there are huge numbers of people who simply lack the ability to develop those skills. Trading is no different from being a doctor or pro athlete. There are mental skills and physical skills and emotional skills. Not every person has those skills. Not every person can become a trader. And the final point is simply this: Why would our newbie want to become a trader? This person comes with zero knowledge and he/she wants to be a professional trader? That’s unrealistic and unbelievable. I would tell that person to learn something about the markets first, get some investing experience behind them (I don’t care f they buy funds or manage their own accounts), read, study and then decide if becoming a trader is still an attractive idea.

      And this is where we differ It’s not an argument. It’s two points of view. I am amazed that you would ask your newbie to watch a trader. It’s impossible to follow in the footsteps when the fog is so deep tan one cannot see below ones’ knees. Follow what steps? The trader bought? Who has the time to explain the different indicators that encouraged the trader to pull the trigger. More than that,who is going to talk about why each indicator is or is not important and how to track each and the importance of each in making the trade/no trade decision? This takes FOREVER to learn. And that specific trader’s skill set may be very different from that of the newbie such that following this trader does no good at all.

      I get it. I do not use technical analysis. I am not a chartist. You are. You like a system, I don’t believe in systems. Our backgrounds are different and so are out approaches. You want to teach what you know. I believe that trading skills cannot be taught to people who come in with ZERO knowledge about stocks, bonds or anything else. Remember that was the premise: A complete beginner. Not someone with an inkling. Not someone with a bit of experience. Someone who never heard of the stock market until this morning.

      Although the idea of training people to become Turtles seemed to work out very well. I do not recall the backgrounds of those Turtles.

      I also believe that following someone else is useless unless you know in advance that these two people are simpatico. I know I could learn nothing by watching a forex trader scalp all day long. I don’t know what he is trading or why he is trading. I simply believe that trying to train a newbie to be a trader instead of explaining how to be an investor is the wrong way to go. Very wrong. But that just me and my opinion.

      I have one other major problem with the details presented above. If I were the developer of a system that demonstrably has a positive expectancy, I would not be peddling stock picks or anything else to the public. I’d arrange a demonstration to a multi-billion dollar hedge fund and sell my positive expectancy system for many (many) millions of dollars. If you also own positive expectancy models, why aren’t you asking a huge price for them, rather than trade them yourself? Honest, I am not doubting your veracity. I simply want to know why you have not sold the system.

      • Garth 04/15/2011 at 12:33 AM #

        The guy who I usually recommend to people sold his hedge fund to the Macquarie Group for around $29 million.

        He retired for a few years in an Australian beach suburb and got bored, so he started running a newsletter service using similar models to what he traded professionally.

        My personal models are simple and boring, but make money.consistently. Buy/ sell micro breakouts in the direction of macro trend when expected volatility is 3 times or more risk. You can buy that strategy in a $25 book, so why would I sell it?

        • Mark D Wolfinger 04/15/2011 at 8:29 AM #


          I had assumed that positive expectancy strategies were rare.

          Thanks for sharing

      • Steve B 04/15/2011 at 11:46 AM #


        Along the lines of Mark’s views, When your friend offers a trade, does he give exit strategies as well? What about adjustment strategies?

        If the newbie doesn’t learn the concepts behind the trade, he won’t know how to fix this.

        I think your plan is missing a key step, and that is figuring out what type of plan/personality this newbie has and finding a trader with the same strategy to follow. I don’t care how successul your friend’s system is, if it is in direct opposition to the newbie’s personality, it will be next to impossible for that new person to be successful in following that system.

        Mark, only because I just read the interviews with the Turtles, I think they had different backgrounds, some with absolutely no trading experience, and some with only very little. Since the original bet was if trading could be taught, I think they steered clear of anyone with heavy trading experience from what they said.

        • Mark D Wolfinger 04/15/2011 at 12:47 PM #

          Steve B

  7. Tom 04/14/2011 at 11:50 PM #

    I have a quick question regarding the LOSS/Breakeven point for writing a covered call. I have read that LOSS POINT=Stock price-Option premium.
    I’m bit confused, shouldn’t it be LOSS POINT=Strike price-Option premium?
    When buying calls, I believe that BREAKEVEN=Strike price Option premium.
    For selling covered call shouldn’t it be the opposite of buying a call? Please advise me on how to calculate the point where I go in loss, by selling a covered calls.
    Thank you very much for advance!

    • Mark D Wolfinger 04/15/2011 at 12:05 AM #


      You read correctly.

      What does the strike price have to do with anything? It plays no role in this calculation.

      You buy stock, paying $53 per share. You sell an option and collect $200.
      You are out $5,100. Your break-even is $51/
      If the stock drops below $51, you are losing money.

      How can it possibly make any difference whether you sold the 60-strike call, the 55-strike call of any other strike price? It does not matter. The break-even is a cash calculation.

      Buying a call is completely different and has no relationship to writing a covered call. It has something to do with selling a naked call, but you are not doing that.

      If you buy a call and are foolish enough to hold it all the way to expiration, then the upside break-even price is for the STOCK to reach the strike price + the call premium.

      Tom, I must say this. You are making something that could not be more simple into something complex. If you pay cash for stock and someone pays you cash for a call option, then you know how much cash you spent in total. Right? Stock cost less option premium.

      Surely you know that when the stock price dips below your cost, you are losing money. Please tell me that you know that. Please tell me that you see that the strike is meaningless.