Options Education For Rookies; The Purpose of This Blog

One of my problems when writing this blog is deciding whether topics that I've discussed, in detail, months ago should be repeated.  Most of you have not been with me since the beginning (last June) and may benefit from such repetition.  Going forward I plan to use some previously posted material to help fulfill my original purpose for blogging – education for option traders.  Especially rookies.

There are different ways to approach option trading.  Here are some of my most basic premises:

1) Trade within your comfort zone.  Any time you own a position that provides too little reward, or encompasses too much risk, or you don't really understand how to handle – then it's time to modify that position.  The simplest course is to close it.  But alternative adjustments are possible.

2) Strategy selection is important, but risk management is crucial to your long-term survival as an option trader.  Trade using a strategy you understand, but don't assume that profits will just come your way.  Take action, when necessary, to prevent large losses.

3) I have four rules to suggest for option traders.  It's important to follow these rules in sequence:

One:    Don't go broke

Two:   Make money

Three: Build Wealth

Four:   Never, never forget rule number one

4) Options can be used to reduce the risk when investing in the stock market.  They can also be used as gambling tools.  Please use options wisely.

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6 Responses to Options Education For Rookies; The Purpose of This Blog

  1. Hi Mark,
    great blog.
    I have trading options for two years with a good performance.
    I didn’t go broke and I make money for this time lol When do you feel you can trade for a living?
    Thanks in advance.

  2. Mark Wolfinger 02/26/2009 at 9:04 AM #

    That’s a big question.
    1) When you are not under pressure. That means you have enough in savings to keep you going if you are not able to make money for the first few months.
    You do not want to be in a situation in which you MUST make money to pay your bills.
    2) If in a relationship, you must have your spouse’s approval. This is a commitment that must be made by both of you. Do not hide your trading results from your partner. If he/she is interested in the mechanics of what you are doing, be sure to discuss how things are going often. If disinterested, as least supply a weekly or monthly oral summary.
    3) I don’t know what size trades you are making. But if you would have to double that size to make a living, that’s dangerous. First, greater size means more risk and that may result in your doing one of two bad things: Ignoring risk or panicking far too early.
    4) Be certain you are adequately funded. If you incur some losses at the beginning of your new carer, would you have a enough money remaining to be able to make it?
    Let’s say you have an account of $100,000 and have been able to earn $3,000 per month. If you need $6,000 to meet expenses, would you double your size, take more risk, refuse to play it safe by refusing to take losses? If you would take more risk, that’s just not good. But, if you have only been using half of your $100,000 account, then you would be in better shape.
    If you have been making near 10% per month (wow!!!) can you keep it up? That’s big money and very difficult to achieve on an ongoing basis – unless you take big risk (more risk = more reward or larger losses)
    If you were to lose $25% and decline to $75,000, you would have to earn 4% per month to generate that $3,000 whereas you currently earn 3%. And if you withdraw those earnings, how will you get your account back to its previous level?
    Be certain you don’t get yourself in a position that may cause you to think about ‘taking a chance.’ In today’s world, it’s not so easy to find a good job and you don’t want to become desperate to earn money.
    5) Be disciplined. Now more than ever. One problem can be overconfidence. Glad you have done well. Why have you done well? I don’t need the answer, but you do. Is it good trading, good timing, luck? Decide whether you can count on whatever you have been doing well to continue.
    You would be quitting a secure (I assume) job to do this, so be certain you are mentally prepared.

  3. Thanks a lot for your valuable and timely reply.
    I must thinking about your advices.
    Mark, it’s always a pleasure reading your blog, keep it going.
    Thanks.

  4. GMG 02/26/2009 at 6:17 PM #

    Mark,
    Excellent blog! I’ve been following your comments at EliteTrader for a while, and you seem like a knowledgable guy with some valuable experience…but more importantly like someone who has their priorities straight. This post is a great example of that underlying philosophy of sanity that I try hard to incorporate into my own trading. These rules are common sense, but unfortunately not common practice for many (short-lived) traders. Anyway, I’ve learned a lot so far from your articles, about options and risk management, and I just wanted to say thanks for sharing.
    Marty
    PS – I’m interested in picking up one of your books. Which would you recommend for someone with a pretty decent understanding of the basics who’s looking to learn some advanced sell-side methods, including the “insurance” measures you often refer to?

  5. Mark Wolfinger 02/26/2009 at 8:04 PM #

    Hi Marty,
    Thanks for the kind words.
    I ignored good advice when I first started, and paid dearly. I’m hoping others can avoid my mistakes.
    The Rookies Guide to Options covers the topic of insurance and why I believe that buying front-month options works best. It’s also the most recent of the three books and contains the most information.
    You can get at a free mini-version here: http://www.mdwoptions.com/freebook.pdf

  6. GMG 02/27/2009 at 7:56 AM #

    Thanks, I look forward to reading it.