Please don’t let this happen to you.

I have been exchanging emails with a rookie option trader, and I must confess it breaks my heart.  I'm not publishing these excerpts from our correspondence to poke fun at him.  On the contrary.  He is making an effort to learn and I'm doing what I can to provide encouragement and good guidance, but his current situation leaves me bewildered and upset.

I am reproducing a variety of excerpts from our exchange with the hope that it will discourage anyone from believing that trading options is a simple game and an easy pathway to getting rick quickly. 

Options are easy to understand.  But trading them requires a substantial understanding of how option prices move up and down; what must happen to earn a profit; the realization that losses occur more frequently than you may have been told by some eager friend; and most importantly, that options are not bought or sold – and then ignored.  You must pay attention to positions and carefully manage risk.

***

I don't know a lot about options but I lost a large
amount of money (for me its very huge, but its not for you).

I just read about a strategy (it looks easy and safe) – the iron condor.

My goal is to have monthly income from options and I want to have a
simple strategy, with a trading plan that is just easy

My research shows that iron condor has a good probability of winning but
many think that if you lose you will lose the entire year's profits.  Is it true?

I think I will use iron condors for my monthly
income

Your [previous] statement that I will take losses part of the time is a big eye-opener.   Before
that, I thought this strategy wins all the time.

I explained that it's not 'easy.'  Nor is there a guaranteed monthly income.  Is it possible for anyone to believe that this, or any, strategy wins all the time?

***

When I mentioned that I never used technical analysis, he was bewildered and asked:

You never use technical analysis?  How do you find your trades?  Or do you just teach and never trade?

I understand that technical analysis is beloved by many and useful for some.  But to believe that one can possibly trade without using it is beyond my comprehension. 

If everyone believed that a stock gave a buy signal, and if everyone wanted to buy the shares, who would sell them?  Just that ought to be enough to convince him that the minority use technical analysis for trade decisions. 

I  know that people trade options with no idea of what they are doing.  Yet when I find evidence that it's true, it bothers me. 

570

6 Responses to Please don’t let this happen to you.

  1. not steve 01/06/2010 at 12:03 PM #

    “…technical analysis is beloved by many and useful for some.” It’s never been stated better! I’ve never found an academic study that solidly supports the use of TA (at least looking through the CXO Advisors excellent archives), yet I’m uncomfortable not looking at moving averages or 20 day highs and lows.

  2. Mark Wolfinger 01/06/2010 at 12:35 PM #

    ‘Knowing’ what others know and understanding how ‘they’ may make support and resistance work (at least for a limited time) costs you nothing.
    Betting the ranch on those charts is another matter.

  3. Andy 01/06/2010 at 5:06 PM #

    Hi Mark,
    I’ve been buying spreads recently instead of iron condors since I fancy myself to be a market prognosticator. That strategy worked for my jan bull put spread but my feb bear call spread in RUT is starting to get a little too close for comfort…hopefully I won’t have to ask you for exit strategies in a few days.
    Anyway, I wanted to ask if my supposition is correct: that the risk is the same for spreads and iron condors with equal deltas. ie: a spread with a 15 delta and an iron condor with a 15 delta will both expire ITM roughly 15% of the time. Somehow I think it’s not that simple since it seems the premium collected has been larger for spreads than iron condors of equal deltas.
    As an aside, I was wondering what your opinion is on the current market volatility? It seems the only index worth trading currently is RUT, but with earnings coming up this month I presume volatility will only go upwards from here.

  4. Mark Wolfinger 01/06/2010 at 8:42 PM #

    Andy,
    Full reply as blog post tomorrow morning

  5. Vido 01/16/2010 at 4:48 AM #

    Hi Mark,
    I have just by chance found your blog and read few lines… Probably you already wrote that – but I just can not resists at this point to repeat the part of the question above – how do you “find” your trades or which are your preferred strategies?
    Thanks a lot!

  6. Mark Wolfinger 01/16/2010 at 10:09 AM #

    reply here