Q and A. Is Hiring a Mentor a Good Idea?

Mark,

As an active options trader I would like to bring up an issue: 

Even after you've got a solid self education (books, internet sites and webinars, paper trading and even live trading) – the nature of the options world is that there is always a lot to catch up, in this risk/reward sophisticated area. The issue is: after "graduating" yourself… does it make sense to practice with real money on your own (starting with modest amounts, of course), or to get a mentor to walk you through complicated stages like: making the right entry to the right strategy, set up exit points, adjustments, repairs and more. There are companies out there which charge a couple of grand, usually accompanied by risk free guarantee (if you don't make money, you get refund). As for myself, I do try to get around on my own, unless I find some mentoring program in which I pay gradually reasonable amounts, and see results as I move forward. What do you think?

Gil

Good questions. And it brings up important points.

There is a huge difference between being a very short term trader and an investor.  They develop different skills when learning their craft.  You must know which skills you need.

For example, timing is far more important for a very short-term trader than it is for an investor.  I consider myself to be a short-term investor.  The strategies I teach are not for day trading. They are meant to be held for a period ranging from a couple of weeks to two years (if you use LEAPS options).  Thus, timing is not at the top of my list of things I believe someone must master.  But, more than that, I don't believe it's a transferable skill.  It takes a big effort and years of experience to become a successful market timer.  I know those who love technical analysis disagree, but this is an argument that may never end.

"Setting up exit points" is also a method associated with day-trading.  An investor modifies such decisions as conditions change.

If you find a mentor who can transfer his/her knowledge of technical analysis and years of experience so that you become able to pick the 'right' entry point for a trade, more power to you.  I don't think it can be done.


1) When ready to trade with real money, I prefer to see an investor/trader begin on his/her own, trading a small number of option contracts.

2) It's far too soon to hire a mentor.  The new trader must gain real world experience because for some, virtual trading is of minimal help.  That's true for those who didn't take it seriously because it was 'only' play money. 

You don't want to hire a mentor and say "Teach me."  It's better to discover the areas in which you want additional help, and find someone who has a proven record of being able to teach those specific skills.

3) Can a mentor help?  Part of the answer depends on how you define 'mentor.'  It can be a teacher or a trainer.  Some may confuse the mentor with a trading coach.

a) For example you say you'd like help with 'making the right entry.'  I believe very few people can time the market and make the 'right' entry.  And if you find someone who can do that, as I mentioned, it's not something that can be easily taught.

b) Yes, there is a great deal to more to learn once you begin trading.  In my Rookie's Guide, I explain 'what to look for' when entering a position and how to manage risk.  That includes exit strategies.  But for an investor, it's not necessary to make the 'right' decision all the time.  I believe the goal is to make a good decision – I call that process 'making the best decision you can make at the time you must make it.'  If you understand a given strategy, if you understand the risk of adjusting a trade compared with not adjusting, if you can take a loss and move on – then your chances of being successful are excellent.  Those are not the sort of items you said you are seeking in a mentor.

c) I don't believe a mentor can do those things.  If you want to be a very short-term trader, then the strategies I discuss are not for you.  As an active options trader, you already know the difference between opening hedged positions vs. naked longs or shorts.

The day trader probably wants to buy calls or puts with high delta, and profit by predicting market direction.  I suppose some short-term traders use option spreads, but that's a very difficult thing to do (too many trades, too much slippage).  It's much easier to day-trade stocks or single options.  But, if you want to be a day trader, then a trading coach may be helpful.  To me, that's not the same as a mentor.

d) I consider myself to be a mentor – but not under any of the conditions discussed so far.  I believe a mentor is a teacher.  Someone who can explain – so the student can understand well enough to go out and make decisions for him/herself. I wrote the book with that in mind.  And I reply to follow-up questions from readers. 

I also take on a few as clients – when they want to get more detailed information on specific strategies or want to discuss various aspects of using options.  But I am not into technical analysis, and never know the best time to enter or exit a trade.  I think you are discussing a mentor who is more into helping you learn about active (vs. passive) trading skills.

e) I consider adjustments and repairs to be part of the education process and not something that an option trader learns to think about after positions are owned.  I recognize that many trades require no adjustment and thus, the newbie gets less practice in a crucial area.  That's one good reason for trading with smaller sums when beginning.  It's not just that the trader is a rookie, but it's also because he/she has no experience with the (sometimes frightening) idea of making an adjustment and locking in a loss.  It all takes time to become comfortable with the entire process.

4) Regarding firms that charge thousands, promise refunds, and spend a great deal of time (that you paid for) telling you that you need more seminars: Don't do it.  They always (randomly) have successful students who provide testimonials, but they will not tell you about the losers.  I have no idea how easy it is to receive a refund.  There is no need to pay that much money.  You have good books.  You have the OIC and CBOE web sites.  You have blogs such as this one where you can learn and also ask questions.  Use the money you would have paid for those seminars to trade, or buy other educational material.

A mentor may be appropriate for you – but please understand just what it is that you want help learning – and most importantly whether someone can teach you those skills.  I'm sure someone may be able to help you better understand specific trading techniques: how to enter an order, should you enter a position as a spread or as individual legs (spread is my answer), why one strategy may be better for you (as you discuss your ideas, the mentor may offer good guidance).  But teaching you to time the market.  No way, IMHO.

279

12 Responses to Q and A. Is Hiring a Mentor a Good Idea?

  1. Sorry but you konw I´m not an english speaker .
    What does IMHO means?.
    Thanks, Antonio.

  2. Mark Wolfinger 03/21/2009 at 8:48 PM #

    I apologize.
    It means: In my humble opinion.
    Mark

  3. Dave 03/22/2009 at 11:08 AM #

    My trading turned the corner when I realized exactly what style was natural for me, or as Mark would say; “my comfort zone”. On the off-chance you did find a mentor with an adoptable style to force into your decision process, the odds of sustainable success would be quite low imo.
    Trading is like a sailboat race. The right boat (trading vehicle) good equipment (platform) and knowledge (books/ education assimilated) is important. But once you’re on the water only your read of the big picture and YOUR style of capturing can lead to success.
    So many people pay an enormous emotional and financial tuition in a guru-inspired chase to become successful. I recommend learning the basics (read Mark’s book!) then dedicate a respectable timeframe to finding your own way in the markets, or, what’s right for you– it’s a lot like the first 2 years of college for some. During this period all importance should be placed on risk management/ capitol preservation and learning, NOT trying to force a profit.
    Just an opinion from a trader that has very few: In the end you must become your own mentor.
    GL!

  4. Mark Wolfinger 03/22/2009 at 3:00 PM #

    Well said.

  5. Ron G. 03/22/2009 at 11:16 PM #

    Hi Mark, great blog. I am new to options. My question deals with your description of the “break even” point with a call option. Is the strike price + cost of the option formula only good when you buy an in the money option?
    Here’s the reason I ask: On paper I bought a POT Apr $80 call for $5.70. The underlying stock was in the $77 range. (my option was out of the money) As the stock went up toward the $80 stock price, the option price went up also. At one point the option price was $6.80 and the stock was near the $80 strike price. It looks to me like I had a $1.10 profit at that point. Hence, my question is whether there is a formula I can use to know when is the breakeven point. I was profitable even before the strike price had been reached; I’m guessing because the option was out of the money. Thanks!

  6. Russ Abbott 03/23/2009 at 12:20 AM #

    I have an analysis of what I think the Geithner bailout plan will be in terms of an option analysis. See: The problem with the Geithner plan .

  7. Mark Wolfinger 03/23/2009 at 7:26 AM #

    Thanks for sharing.
    Is it really as bad as that ? I certainly hope not. Right now – pre-market – the street likes the idea.
    Perhaps the banks are forbidden to bid or be involved with anyone who does? Would that really stop them?

  8. Mark Wolfinger 03/23/2009 at 7:37 AM #

    Ron,
    1) Forget break-even (B/E) points. Those calculations are for people who foolishly intend to hold an option until it expires.
    2) But, if you still want to know, AT EXPIRATION, to achieve break-even for a call owner, the stock must reach the sum of (strike price + premium you paid).
    3) But, as you see, you already have a profit. I don’t know why you say ‘it looks to me like I had a profit.’ If you can sell an option and collect MORE than you paid for it, you have a profit. Surely you KNOW that’s true.
    4) If you don’t know that’s true, then you have no business trading options or anything else. This is a simple fact of life. Buy at one price; sell at another. If the sale price is higher than your buy price, you make money. If it’s lower, you lose money.
    You are getting yourself confused for NO REASON. Forget formulas. You don’t trade formulas. You trade with dollars.
    5) The fact that the ‘option was out of the money’ is once more irrelevant.
    6) Here’s your break even formula. You can use it at any time. You can use it before expiration. You can use it for any option. Ready?
    BREAK EVEN POINT: Buy price = Sell price.
    That works for options, stocks, any commodity. It works for the grocery store, restaurant, and any business.
    It works for your budget: Spend every penny you earn = break-even (and a dismal financial future).

  9. whatismyoption 03/24/2009 at 4:57 AM #

    Hi Mark
    Small comment based on the question about IMHO. Have you thought about what a waste of space those fours letter are? If it’s not your opinion whose is it? “In my opinion” and “in my humble opinion” are two of the worst expression in the English language. If you’re writing we know it is your opinion. Do you think people confuse your opinions with facts?
    Great thoughts behind this post. All investing is about knowing yourself and finding the finding your groove.
    Dean

  10. Mark Wolfinger 03/24/2009 at 7:18 AM #

    I’ll try to remember.
    Occasionally a statement appears to be a fact, not an opinion, and clarification may be necessary.
    However, you are correct – it’s a phrase used far too often.
    Thank you.

  11. Gil 03/24/2009 at 9:19 AM #

    Mark,
    A company named “Spread Trades System” is trying to seduce me, claiming that they are the only one who teaches and practices many strategies with adjustments. As usual, their price is few grands.
    I tend to let them down, unles they agree to charge according to some “success” criteria: Meaningly not money back guarantee, but the other direction: making money according to their directions and pay only then…
    1) Do you know this company?
    2) What do you think about my idea?
    3) They also claim that IC is not a right strategy for these days. How about that?
    Thanks,
    Gil

  12. Mark Wolfinger 03/24/2009 at 9:45 AM #

    1) never heard of them
    2) Their web site looks okay, but there is very little information.
    3) There are no huge secrets in the options world. I’d guess they were using IC, but if they say otherwise, who knows? I agree IC not best in volatile markets. Thus, I always own some (not enough) insurance. I don’t know their gimmick.
    4) I cannot imagine anything being worth thousands of dollars, but many people routinely pay such fees
    5) I doubt it’s a SCAM. Instead, I assume it’s charging far more than the information is worth.
    6) I prefer to learn by reading. Others prefer a lecture. But these guys simply chage 10x more than the course is worth – an opinion offered with incomplete knowledge of what they offer.
    7) If I were in their shoes, I’d offer to teach you in return for access to your account so I could verify profits. But I doubt they will do this. They would have to trust you not to have another account and you don’t want anyone to see your personal inforamtion. It cannot hurt to ask – but you would have to verify profits and I don’t see how you can do that.