My Philosophy on Options Education

I recently created a new home page for the primary purpose of displaying the content in a single column, with no side columns for ads.  At the same time, I added extra pages with new content.

Most readers have not yet found the new pages, and I'm reproducing the page that contains some of my  thoughts on options education.


Education: An activity that imparts knowledge or skill.

When
I work with individual investors or write blog posts and books, my
objective is for the reader to learn something he/she does not already
know.  That includes providing enough details that the clouds disappear
and the reader gains a better understanding of the topic under
discussion.  

Careful and detailed explanations take
time to explain.  If you require instant gratification and the ability to attend
one webinar or lesson and then immediately begin trading, I cannot help
you.

Details?  What
does that mean? I stress the details that help you reach a better
understanding of the lesson material.   Unless the topic is risk
management (and that's a big topic) there is no reason to bother with
details of events that are extremely unlikely to occur.  My job is for
you to come away from a lesson with something of value for your trading
career.  And that's true for the trader who devotes only two hours per month to his/her investments as well as the full
time trader.

There are
trading tidbits that you will accumulate and points of view that you, the trader will develop
over the years.  Rather than wait for traders to slowly gather insights on certain more advanced topics, I prefer to see that you get an inkling of the importance of certain features of options – even when it may be soon soon for some students. 

One example is the idea that two very different-looking positions can be equivalent, i.e., they produce identical profits and losses under all market scenarios. Most beginners don't get introduced to that concept until they are well into their trading.  I believe this idea is so important to an understanding of how options work that I introduce it early.  If anyone does not see the importance, or does not yet understand how equivalency works, no harm done.  The idea has been mentioned and soon enough, as specific trade ideas are introduced, the 'eureka' moment arrives and the concept becomes clear.  Accelerating the date of that moment makes better traders of those in the class.

We
all wish we had understood something more clearly,or recognized the true
risk of an innocent-looking position earlier in our trading careers.  For example, I believe the
successful trader must concentrate on risk as his/her primary focus. 
Many others prefer to concentrate on profit and loss, and do anything in
an attempt to achieve that profit.  That is dangerous for reasons that
may not be obvious.

When
you grasp the 'little extra stuff' early in your career, it often makes
a big difference in whether you succeed or ultimately give up the
game.  The very first rule to understand is: Don't go broke.  It seems
obvious, but it's something ignored by too many traders – until it's too
late. I help traders learn how to minimize the chances of going broke.  It's not as simple as: "Don't take a lot f risk in one trade."  Some traders lose their accounts slowly and end up just as broke as the person who blew up over a single trade.

When I clarify some previous misconception
held by a student, that is truly hitting the jackpot (for me).  Trading
is a business that punishes mistakes.  Everyone tells us that we learn
from our mistakes.  That's true ONLY when the mistake is recognized. If a
trader repeatedly acts on a misconception, those mistakes are difficult
to discover – and hence, are going to be repeated.

I love
the breakthrough when something under discussion results in an 'aha
moment' for the student.  As a writer, I never know when that happens,
unless you let me know.

So what do I mean by that introductory statement – to teach something you don't already know?  Here are some examples that appear frequently in my writings:

  • Explaining something from a different perspective
  • Including extra details, just in case they can provide a better understanding
  • Including information to answer questions before they are asked
  • Explaining the rationale behind my opinions. 'Why I believe it's true'
  • Outlining a philosophy based on common sense, and not on traditional rules
  • Being willing to take a minority stance – but always telling readers when most others have a different point of view
  • Encouraging readers to think for themselves before making decisions
  • Continuously stressing the importance of risk management
  • Explaining that choosing a good trading strategy is just the beginning
  • Why trading near-term (front-month) options is more risky that it appears
  • Why it's easier to make money by selling, and not buying, option premium
  • Why selling naked short options is too risky for most traders (unless you sell puts with the intention of owning stock)
  • Sharing the opinions of other option writers and bloggers


Individual consultation

When
working with a trader one on one (at very low rates), my philosophy is
to help with specific topics of interest to that student.

I
don't have 'lessons' prepared in advance. I don't have any specific
number of lessons planned.  These sessions are designed to answer your
specific needs.

I've
discovered that most people prefer e-mail correspondence because time
is used efficiently.  I reply to the questions and offer advice.  Then
you take all the time needed to think about what comes next (if
anything). I appreciate that time is money, and prefer to see your money
used to fund your trading account..

Risk Management

Concerned with capital preservation
At Options for Rookies we live and breathe risk management.  I stress
the importance of controlling risk from the very beginning of your
trading career.  This is not a topic suitable only for experienced traders. Why?

If you trade without measuring and controlling risk, the risk of ruin
is too high. Don't count on a lengthy trading career when being aware
of, and respecting, risk is not at the top of your priority list.

When
dealing with the stock market in any capacity, you are dealing with
statistics.  You must be alert for unlikely events.  By being aware
of the probabilities of winning and losing, you can trade only when the
reward justifies the risk. 

You
will have many winning trades by doing just that.  However, long shots
have their day and black swan (unexpected) events do occur.  Your
task as a trader (and mine as a teacher) is to see that you are prepared
for the unlikely event. 

As a premium
seller, gigantic market moves represent the enemy.  Portfolios can be
protected against disaster, if you are willing to pay the price of
insurance.  One alternative is to be very careful when sizing trades. 
Be aware of the worst case and you can limit losses to an acceptable
amount.

It's all part of risk management.

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4 Responses to My Philosophy on Options Education

  1. Dimitris 09/27/2010 at 10:10 AM #

    Mark,
    You have mentioned several times that, according to your comfort zone, you start thinking about some kind of adjustment, once the underlying has touched the short strike price of your IC.
    Do you take action irrespective of the time remaining until expiration? For example, if you open an IC position with 90 days remaining to expiration and the underlying makes a rapid move upwards and touches your short call strike within 10 days (so 80 remaining until expiration) do you still make the adjustment or you wait for some more time? (most probably, after a big rapid move in such a short time the underlying will move in the opposite direction)
    Many thanks for your time and the great education you offer to us every day.

  2. Mark Wolfinger 09/27/2010 at 10:28 AM #

    Dimitris,
    I have revised my adjustment methodology. I now find that waiting until the strike is touched is far too dangerous. I adjust significantly earlier.
    More tomorrow.
    Thanks

  3. mark 09/27/2010 at 8:27 PM #

    Mark,
    I have read your book, options for rookies, and have been following your blog for several months. How do I sign up for individual consultations?
    Thanks

  4. Mark Wolfinger 09/28/2010 at 7:19 AM #

    Mark
    You asked in the right place.
    I’ll be in touch via e-mail.