I’l Like to Teach the World to Trade Options (Conservatively)

What is about option trading that makes me write so passionately about it?  In addition to this blog, there are books, magazine articles and a web site.  I teach the basics and beyond, explain how to adopt limited risk strategies, preach the importance of risk and money management.  I want people to have a more secure financial future, and believe they have a much better chance of reaching that goal by using options to reduce risk while owning stock market investments.

Teaching is not enough for me.  I also express my frustrations (outrage) with a system that discourages investors from adopting option strategies. 

  • Most brokers have taken a neutral to outright negative bias towards options.  In recent years, several brokers arrived on the scene, with a distinct bias towards options.  They actively promote the use of options and make a strong effort to educate their clients.  These include: TradeKing, OptionsXpress, thinkorswim and OptionsHouse, but there are others.
I'm
hoping that these brokers will change Wall Street's mindset.  The old
school is definitely too old, and out of touch.  There's even one broker
(Raymond James) that does not
allow clients to use options.  Can you imagine refusing to let a client reduce the risk of investing?  Do they deserve to stay in business? 
  • The situation with financial planners and advisors is even worse.  Very few know anything about options and that means that options don't exist as far as their clients are concerned.  What a loss for those clients!
  • Many personal finance bloggers supply great advice to readers: Choose passive investing over actively managed mutual funds.  No need to pay fees to managers who cannot do better than the market averages.  But they miss the opportunity to make passive investing even better by not educating their readers about the benefits of protecting portfolios with occasional option trades.  Those of you who choose to own SPY, QQQQ, or any of the many other exchange traded funds with listed options, can readily adopt option strategies for added safety

I'm not the only voice in the wilderness.  There are other bloggers who want to spread the good word about options.  They educate and discuss various aspects of trading options.  Alas, there are also the hype artists who talk about using options to make great sums of money in a short time.  Sure you can use options as a lottery ticket, but why would anyone try to teach investors to  gamble?  These hypesters charge large sums to teach one or more simple strategies.  There are several excellent places where investors can learn those methods for little or no cost.

Those hypesters give options a bad name, and I'm distressed that one them was recently taken over by a reputable broker.

Options for Rookies may be a voice in the wilderness, but if you, readers of this blog, agree with what I'm trying to accomplish, you can help.  Encourage other investors to visit this blog.  Recommend posts you find worthwhile by linking to Digg or del.icio.us (links below each post). 

And more than that – if you have specific topic you would like to see discussed, please make the suggestion as a comment.  If you see a post or comment with which you agree, or especially disagree, please feel free to post a comment – explaining why you disagree.  Lively discussion is a big part of the education process. 

I have strong feeling and express them freely.  But they are not gospel, nor are they to be adopted by everyone.  I always urge readers to think for themselves and adopt trading methods that place them securely within their individual comfort zones.

I'd like to teach the world to sing trade options.  You can help.

Teach the world

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6 Responses to I’l Like to Teach the World to Trade Options (Conservatively)

  1. I have never traded an option and got the idea to learn more from Preet at “Where does all my money go?”. As you probably know he has mentioned your blog as a great place to start.
    I have been reading your book and spending lots of time at the OIC and CBOE websites.
    I have a virtual account going with optionsexpress thru the CBOE website.
    In your opinion who are some of the other reputable bloggers that an options rookie should be reading?
    DJ

  2. Mark Wolfinger 06/08/2009 at 11:55 AM #

    Yes, I visit, and comment on Preet’s site.
    You found good places: CBOE and OIC. They have a great deal of information for option traders.
    Regarding bloggers: The ones I follow regularly and not for beginners per se, but you can take a look at them and continue to visit any that appeal to you.
    Just a word of caution: There is much information on the Internet. Almost all is published by thsoe with good intentions, but alas, there is always some misinformation. When you run into conflicting dieas – that’s not so terrible. You can think it throuhg and try to decide which point of view makes sense. Or you can send questions to me, or other bloggers, looking for clarification.
    1) Not specifically options, but pshychological material for all traders. Note: a lot of his material is for day traders and is inappropriate for us. A lot of his stuff is chart reading and technical analysis – but it’s the pshychology of trading that I find so helpful.http://traderfeed.blogspot.com/
    http://adamsoptions.blogspot.com/
    http://www.condoroptions.com/
    http://vixandmore.blogspot.com/

  3. TR 06/08/2009 at 6:15 PM #

    Hi Mark
    I have a question on executing your 1 penny per day rule for closing out spreads and brokerage fees.
    I use interactive brokers and what I have found helpful for me is to put on a Good Till Cancelled order offering 0.30 for each put or call spread. I have been putting on the order when the options are about 60-70 days or so from expiry. In many cases this has worked fabulously, as the up and down movement of the market has in some cases closed both sides nicely and automatically well before the options are 6 weeks from expiry.
    What concerns me with this approach is that in some cases as time winds down I feel I should reduce my offer to 0.25 to stay with the “offer a nickel per week” approach which philosophically I like. My broker tells me that when I change the price on an order it triggers a cancelation and there is a cancelation charge that I am hit with. I have to admit (sheepishly) that I don’t fully understand exactly what the cancellation charges are, but I beleive that these charges are in fact applied to my account.
    Do you have any suggestions for how to offer the 1 cent per trading day approach, without incurring too much in transaction costs? I would appreciate it if you shared how you have managed through this challenge in your own trading?
    Rgds
    TR

  4. Hi Mark,
    I have a couple questions that may not be exactly for beginners, but probably cover information all traders should know. The first is in regards to position sizing. I am reading Ralph Vince’s book and I am not much a math person so I am struggling to understand Optimal f. To what extent do you use Optimal f, or a different system, and do you think you could do a post (even a very basic one) on position sizing methods?
    JRR
    My second question is in regards to analysis methods. You mentioned above that technical analysis is not particularly relevant for us. Since options are inherently shorter-term vehicles than stock, it seems that as much as TA seems a lot like reading tea leaves or chicken bones, it’s probably more useful in the short term than fundamental analysis. What kind of analysis do you recommend for options from the front month out?
    Thanks and I love the site.
    JRR

  5. Mark Wolfinger 06/08/2009 at 7:20 PM #

    Hi TR,
    1) The cancellation fee is charged by the exchanges and some brokers pass that cost along to the customer. You can see the charge. If you look at your monthly statements, you will see ‘Fees.’ It’s not much dollarwise, but I still resent paying that fee. It’s not justified.
    2) I enter a day order every morning. But it’s no trouble because I don’t have that many spreads – on any given day – for which the bid is reasonable.
    3) With implied volatility so much lower, and with the premium I can collect by selling a call or put spread less than it was several months ago, I am a bit less anxious to cover. I still enter my order every day. In fact, today I bought some Jun 420/430 put spreads.
    I will not bid less than 10 cents. Either I want to cover at that price, or I don’t want to cover. Right now, my portfolio is very positive to the downside that there is no need to cover puts. So I bid a few pennies less than my normal bid.
    A great deal depends on how badly I ‘need’ to cover. When I need/want to cover, I’ll bid more. When I don’t need it, I’ll bid less.
    I don’t consider this to be a challenge.

  6. Mark Wolfinger 06/08/2009 at 7:55 PM #

    JRR,
    1) Finding the optimal allocation of funds (optimal f) per trade is not something I do.
    When all events in which a bet (investment) is placed have an equal chance of winning (roulette) then allocating assets per a mathematical model makes sense. After all, each bet is equal to all other bets.
    When investiing with options, or any other financial instrument, each trade is not equal to each other trade. You want to invest a little more in the trades with better rewards or reduced risk, and less on trades that are not, a prioi, as favorable.
    I really don’t know how to do that. Thus, I cannot realistically adopt Optimal f. And I don’t see how others can – when investing. To me it’s strictly a gambling tool. That said, if you do a simple calculation to get a reasonable estiate for Optimal f, it can’t hurt – unless you are uncomfortable investing that amount per trade.
    I suppose that a profitable technical analyst may have a way of esitmating the probability of earning a profit from a given trade and then invest optimal f plus or minus something, based on that probability.
    Sizing: Some investors like the idea of risking no more than x% on any given trade. That doesn’t work for me and my type of trades. An option or stock buyer could do that, but I never know just how much I am risking per trade – based on the assumption that I will not allow losses to reach their theoretical maximum. Without knowing the realistic potential loss, I don’t see any way to size positions that way.
    I keep it simple: If the trade makes you uncomfortable, if it’s possible to lose more than you are willing to lose, then the size is too large and it should be reduced. If a positon exits your comfort zone, it must re-enter thatzone, and one easy way to accomplish that is to cover some, and reduce size.
    2) Day traders can make the most use of TA, but it’s not feasible to trade options that way because option prices depend on much more than the stock price. Along with wide bid/ask spreads, that makes slippage significant. Stocks are better insstruments for day traders.
    Long-term investors can use TA to trade LEAPS with a directional bias.
    But, when trading options as a premium seller with negative gamma positions (as I do, and recommend), front-month or otherwise, finding support and resistance points and building a position around those points is how I’d use analysis. Sell calls above resistace and sell puts below support.
    I believe a serious technician would make directional bets with options. I suppose a market-neutral spread is possible when the analysis calls for a steady market.
    I agree that FA is not too useful for short term trading and that includes front month options.
    Thanks for the kind words. Tell others to visit!