Q & A. Maintaining Confidence


Do you make enough money on the months in which you don't lose money to offset the losing
months?   I had two very bad months and it's made me lack the confidence to trade.

Also what kind of annual returns do you shoot for. I'm happy
with around 30-40%

It good to hear you say 'there's going to be lots of profits.'   That gives me some faith as I really got shaken by my big loss in
Jan '08. I still don't have strong belief that I can make good money doing
this [buying iron condors]….especially with many experts making negative comments on premium
selling. You know the guys I'm talking about. They give good advice but
just keep hammering into us that we're gonna get killed if we sell
premium. Do your losses make you a little gun shy?


Lots of ground to cover.  I'll try to be succinct.

1) Yes, profits outweigh losses.

2) I don't have a target annual return.  I try to manage my positions to provide a 'good' return (that definition is different for each trader) – while keeping risk at an acceptable level.

3) 30%+ per year is a very good return for anyone.  Sure, you can try to earn more, but would you be happy with the increased level of risk?  Are you aware that making 30% per year doubles your money about once every 2 1/2 years? That means after 10 years, $1,000 becomes $16,000.  One quarter million after 20 years and $4 million after 30 years.  Do you really need to do better than that?

4) Yes, I believe that most iron condor buyers make money much more often than they lose.  That's because most adopt a strategy of selling options that are far OTM.  Whether that's a good idea or not is beyond today's post (but I think it's not as good of an idea as it appears to be).  But when your chances of success in any given month is 80 to 90%, you know you will have lots more winning months than losing months.  Your task is being certain that those losing months do not wipe out years of gains.

5) Most premium sellers do eventually get hurt.  There are two main reasons for this:

  • Many sell naked options.  That gives them positions with unlimited losses.

  • Most who sell premium think it's an easy road to success, and get lazy.

They do NOT exercise good risk management skills.  That means they take substantial losses far too often. When that happens, success is unachievable.

6) My losses disappoint me, but I know it's part of the game.  Large losses are very disturbing because it means I did something wrong. Perhaps waiting too long before taking action, but more likely because I bought too many iron condors.  I do not lose confidence because I know I understand how to make money by using an iron condor strategy.  If I have the discipline to adhere to the instructions of my risk manager (that's me), I will succeed.  If I do not believe the advice my risk manage offers, I will not succeed.

As to your lack of confidence, all I can do is ask:  does your risk manager know what he is doing?  Do you trust him?


Some strategies are not suitable for certain personalities.  Worse than
that, trading is not for everyone.  And if you absolutely HATE taking
some risk, it's impossible to succeed.  If you gamble and take too much
risk, you will probably lose also.  It's not a simple path. 

If you can't be a trader, it's best to recognize that at some point.  Being a successful investor is also rewarding. 

Don't give
up – at least not now.  Perhaps a different option strategy is more
suitable for you, or perhaps you can do better with iron condors.  Reduce your size and practice risk management.

Bottom line advice:

Your primary goal is staying the game and not going broke

Your secondary goal is making money.

Your tertiary goal is becoming wealthy.

DO NOT forget the importance of this sequence.



8 Responses to Q & A. Maintaining Confidence

  1. Mike S. 09/04/2008 at 5:22 PM #

    Mark, You may have answered this before but I wonder if it’s possible for an average guy like me to be a successful options trader. If I understand options and learn everything I can then, in theory, will I be able to make money buying and selling options? Is anyone making money with options other than the house?
    What do you think or suggest?

  2. Mark 09/04/2008 at 11:12 PM #

    It’s true that the market makers have advantages that you lack. But investors make money using options and the market maker edge need not concern you – if (and it’s a GIGANTIC ‘IF’) you adopt strategies that give you a decent chance of winning.
    If you buy options, the odds of success are stacked against you. If you have exceptionally good market timing skills, then you can probably be successful when buying options. Buy almost no one has such skills.
    If you like to buy cheap, far out of the money options, you have almost no chance of making money over the long term.
    If you sell naked options, you will collect lots of money in premium. But the unlimited risk associated with that strategy makes it highly likely that you will eventually go broke. The possible exception to this rule: selling naked puts is acceptable, but ONLY if you want to buy stocks at lower prices. If buying stock is not your goal, then selling naked options should be out of the question.
    I recommend, and describe in The Rookie’s Guide to Options, specific strategies with limited risk. You can succeed as an options trader if (and only if) you really understand how options work and how to use them – and – if you develop good risk management skills. Making money is not the difficult part. Keeping those profits and preventing large losses is THE key to success.
    Begin by trading in a paper trading account. Learn, learn, and learn more. Get a ‘feel’ for the stocks (or index) you trade. KNOW which strategies are comfortable for you. Understand how to manage risk. Then you can begin using real money on a small scale.
    Here is a list of the recommended strategies:

  3. dave 09/05/2008 at 7:19 AM #

    I have become a big fan of your blog and was wondering what index options do you trade besides the $rut? And do you trade equity or future options as well? I do mostly emini s&p future options and the spy. Thanks again for all your great work .

  4. Mark 09/05/2008 at 8:31 AM #

    Thank you.
    I trade only RUT. I tried to add SPX, NDX, as well as the retail index and SOX. It was too difficult for me because: I had too many positions to be able to monitor portfolio as well as I prefer.
    I chose not to use futures options, although some people have told me that there are advantages to doing so.
    If those are the trading vehicles that work for you – that’s great. All else being equal, I’d prefer to trade S&P 500 also – rather than RUT, but it takes ‘forever’ for my broker to return fills and I cannot accept that. Thus, it’s RUT for me.

  5. Roland 09/05/2008 at 6:01 PM #

    What is it about the S&P that takes so long to get info back on fills? Does this all happen electronically these days?

  6. Mark 09/05/2008 at 9:57 PM #

    As far as I can tell, SPX options are not traded electronically. I don’t know that for certain, but my broker (Interactive Brokers) cannot get electronic fills for me. And that’s more than enough reason for me not to trade them.

  7. Roland 09/06/2008 at 3:51 PM #

    I was just watching a TOS video and the guy mentioned that TOS does not offer products that can’t be traded electronically. TOS does have SPX options.
    SPX is only offered on one exchange and has very wide bid/ask spreads.

  8. Mark 09/07/2008 at 1:06 PM #

    SPX trades only on the CBOE – true.
    Perhaps things have changed, but it required more than 30 seconds for me to receive a fill from my broker, so I simply stopped trading SPX options.