Tag Archives | options education

Abandoning your favorite option strategy? Reconsider

An excellent post by Jared at Condor Options was also picked up by Abnormal Returns. [If you are not familiar with the work of Tadas at Abnormal Returns, it's worth the visit.  He finds the best blog posts, and it's more than I can find time to read.]

Jared suggests treating a strategy as you would a favorite stock: Buy on dips:

"If you’re trading a strategy with a long-term record of solid
performance… a great time to increase
your exposure to that strategy is after the strategy has suffered a
losing period.

In other words, given a strong and consistent strategy,
you should buy that strategy on the dips."

That is an interesting suggestion based on mean-reversion.

When investing, and more often when trading, we tend to buy on dips.  We remember price levels at which we had previous success when buying a certain stock. Technical analysts consider this practice to be 'buying at support.'  It makes sense.

However, I confess that I've never done that.  When a strategy is not working well, I tend to cut back, rather than expand position size. 

"A strategy that has performed well over the long run should never be
abandoned after a decline, unless there is overwhelming evidence that
something about markets or the strategy has changed so fundamentally
that the strategy will never work again."

When there is a solid, fundamental reason for abandoning a strategy, then do it.  But when the decision to change strategies is based on an expectation of further losses (with no solid basis for reaching that decision), that's an emotional decision.  Jared goes on to say:

"Based on my own experiences mentoring and educating option traders, I
think that the most important factor differentiating unsuccessful
novices from those who survive long enough to become experts isn’t that
the latter group knows more about the option Greeks, or is better able
to analyze implied volatility, or anything like that. The decisive
factor, as trite as it sounds, is that successful traders are willing to
base decisions on information rather than emotion


Visit the new Options for Rookies Home Page, with links to new material, including my thoughts on an options education.

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Trader Education: Essay by Bill Luby

This blog is devoted to options education.  I recognize that other bloggers emphasize education and I'll occasionally share some thoughts from these bloggers.

A couple of days ago, Bill Luby (VIX and More) published a piece that had already appeared in Expiring Monthly magazine (May 2010), and I'm sharing it with Options for Rookies readers.

you remember from your school days those students who, when confronted
with a complex issue, would acquire a look on their faces somewhere
between consternation and dread, immediately thrust a waving hand up
into the air and blurt out in a worried voice, “Do we have to know this
for the test?” I can be fairly sure that none of these people ended up
as successful traders.

One only has to look at the history of
hiring patterns at Wall Street firms to get a sense of the evolution of
thinking about how to develop a successful trader. For many years, the
model for aspiring traders was considered to be a genteel Ivy League
education. Over time, Wall Street firms began to favor graduates with a
more humble socioeconomic pedigree who were considered hungry, hard
working and highly motivated to prove something to the world. In more
recent years, we have seen Wall Street seek out physicists and those
with exceptional quantitative skills. Lately, a desire for poker skills
has also come into play.

As I see it, all traders are ultimately
self-taught. There are no required classes, readings, homework
assignments or even a syllabus with recommendations. Tests are
administered on a daily basis, frequently with multiple tests on the
same day. Worst of all, everyone is graded on an unfavorable curve in
which there are more Fs than As.

Against this backdrop,
education counts, but skill and experience count even more. An
insatiable curiosity helps, as does a willingness to explore unfamiliar
territory. Great trades, insights and strategies present themselves in
somewhat random fashion and, as Louis Pasteur observed, “Chance favors
the prepared mind.”

But what kind of preparation is ideal?
Malcolm Gladwell [in 'Outliers''] asserts that 10,000 hours of experience is a
prerequisite for greatness in almost any field. In a normal career, that
level of commitment usually translates to five years, but on Wall
Street, 10,000 hours of experience can be crammed into 3–4 years. Of
course, all hours are not created equal. A trader’s capacity to
distinguish between random events and meaningful patterns is important
to establish a solid trajectory of growth and development.

my personal education process, unlearning was more important than
learning. My formal schooling consisted of an undergraduate degree in
political science and a traditional MBA program. After two decades of
business strategy consulting experience deeply rooted in fundamental
analysis, I was ill-equipped to excel in a short-term trading time
frame. In order to embrace technical analysis, I first had to jettison
my fundamental perspective on investments and build a new foundation
based on technical analysis and market sentiment.

In my opinion,
the best way to approach trading is to consider the educational process
to be a lifelong endeavor, crossing as many multi-disciplinary
boundaries as can be digested. In a way, I like to think of the
foundation of trading success as building a large idea stew and
developing an eye for spotting high potential new ideas. The trick is to
have the right breadth and depth of knowledge so that when one stumbles
on the next great strategy, it can be easily identified, captured and
developed. Call it opportunistic research and development, if you will.

luck would have it, some of the most successful trading strategies I
employ are based on areas in which I had limited knowledge when I first
encountered them. No matter how well things are going, I take the
approach that I never have the luxury of being satisfied with the status
quo and need to embrace the idea of getting out of my comfort zone. In
trading and in life, it pays to constantly refresh the pipeline of new
ideas and continue to tinker with them, because you never know what will
be on tomorrow’s test.

As options traders, there are some differences in our approach (longer holding period is the most obvious). However, all traders have some traits in common and Bill's story applies to us as well.


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Attacking Advice from an Options Guru

Options for Rookies New Home Page

Bernie Schaeffer, from Schaeffer's Investment Research, long-time options analyst and trader offers his comments on why an investor should be trading options in today's market.

After reading the piece (quoted below), I tried to communicate with him via his website. I wrote that I was going to offer contrary opinions and asked if he wanted to discuss the issues.  I received no response.

I've inserted my comments amidst his advice.  In my opinion, the suggestions offered represent the worst possible advice one can offer to an options trader.  Especially when it's intended for a general audience.

In my opinion, it imposes the wrong mindset (making profits is easy, picking market direction is easy, trading options is a simple game), giving those who follow the guru little chance of learning to use options profitably.

Yes, that's a very strong statement.  I believe options education must include information that gives the reader a reasonable chance to earn money.  But no one hands that cash to you.  It requires discipline, practice, and understanding what you are doing when making a trade.

When you teach a beginner to buy options and predict direction, you set him/her on a path of financial ruin.  The shameful part is that there's no warning of how difficult it is to earn money via this strategy.  All our guru talks about is high leverage and the possibility of making big profits. There's no mention of the odds of succeeding.

When we consider that traders who follow these suggestions probably lack much (if any) experience managing risk, it's a recipe for disaster  The only redeeming virtue in this article is the recommendation to use only a modest portion your trading account.

I have no idea of why Schaeffer's Investment Research believes that most traders can successfully predict market direction when the evidence is clear that professional money managers cannot do it (most mutual funds underperform their benchmark indexes).  If this advice is not intended for the masses, but is specifically for people with a proven track record of beating the market, then I can forgive the advice.  But when it is general advice offered to the masses, I must fight back.  I know his readership is at least 10 (if not 50) times larger than mine, but I'm not willing to let his advice go without making an attempt to salvage the situation.

The article:

"The stock market gets no respect these days.

On July 27, an article entitled "Ten Stock Market Myths That Just Won't Die" was featured in The Wall Street Journal.
It attempted to debunk just about every reason your broker has ever
given you for investing in stocks – from "investing in the stock market
lets you participate in the growth of the economy," to "the market is
really cheap right now," to "stocks outperform over the long term."
Overall, it adopted a very cynical, negative view of the market."

As well it should be.  Too many brokers and other financial professionals are out to earn commissions, not to serve customers.  Warnings are necessary.

"If this article, which ends with the comment "In the long run, we are
all dead," is your idea of helpful investment advice, then please read
no further. But at the same time, if you're expecting me to try to
"debunk the debunker" by giving you 10 reasons to be bullish on the
market, then I have a surprise for you. While I do feel that the
unprecedented rush to the exits by individual investors and the
extremely negative press that has dogged this market since early 2009
will ultimately prove to be very effective contrarian indicators, I
understand the frustrations investors feel with the post-"flash crash"
market in all its high-volatility, directionless glory.

Instead, my message to you is about avoiding these stock market
frustrations and actually setting yourself up to make some money. I'm
sure you understand this will not happen by you sitting in cash vehicles
that guarantee you safety but pay you no return. You are being
"rewarded" for the risk you are taking, and that reward is zero. But at
the same time I'm not suggesting that your only alternative is putting
your money in the market. What I'm in fact suggesting is that you commit
a relatively modest portion of your capital to STRATEGIES designed to
EXTRACT MONEY from the market, regardless of direction, or even if there
is NO direction. And the only investment vehicle that can accomplish
this for you is options."

Committing only a modest amount of money makes sense.  I can agree with that.

Adopting strategies that are designed to extract money from the market also makes sense.  However, isn't that the purpose of every strategy? 

The difficult part is knowing which strategies to adopt and when to use them.

"So in the format of the aforementioned Wall Street Journal
article, but with the goal of providing you with actionable information
designed to grow your portfolio, allow me to list for you 10 reasons why
you should be trading options right here and now.

  • The calls in your options portfolio will allow you to
    achieve big leveraged gains if the market catches most investors by
    surprise and rallies through year-end"

That's true.  But the bigger truth is that you can readily lose 100% of the capital
invested.  Bernie, I admire the fact that you caution investors to use
only a 'modest portion' of their portfolio for these plays, but they are still high risk plays that require accurate market prognostication.

"The puts in your options portfolio will protect you against
"flash crashes" and other disruptive market events and even allow you to
profit in these situations." 

This is also true.  Are you suggesting that buying both puts and calls gives your investor a good strategy for extracting money from the stock market?  I believe it's far more likely to extract money from his/her investment account.

As the 'flash crash' made obvious, it's not easy to get orders entered, and even more difficult to get them filled, during such an event.

My conclusion is that another flash crash is unlikely, and preparing for it is a waste of time and money.  Preparing for a true market debacle is another story, and being certain your portfolio is not decimated when that happens – makes sense.

  • "You can still benefit from the unlimited profit potential of option buying yet limit your loss from any trade to 20-30%."

Limit losses?  Are you suggesting that option buyers unload their positions when losses reach that 20 to 30% limit?  That hardly gives them a chance to profit if that 'big rally' doesn't begin pretty soon. Limiting losses is a fundamental aspect when trading, but not for the scenario you described.  You want them to be involved if there is a rally through the end of the year, but you don't want them to own positions when losses exceed a designated limit.  Those are conflicting goals.

  • "You can profit from market volatility regardless of the direction of the price movement."

You can lose from market stagnation, or reduced volatility – regardless of direction.

  • "You can profit from buying calls on stocks that outperform,
    and at the same time buying puts on stocks that underperform their
    industry peers. That's the easy part." 

We all know how easy it is to pick which stocks will outperform.  The proof is in the fact that each of your clients has already achieved multi-millionaire status and is heading towards the billionaire level. 

And your newsletter must be at least 95% accurate when picking direction.  It's a cinch to do this. Just look at all the mutual funds – who pay big salaries for management personnel, and their track records. 

Hmmm…I must be missing something here.  Those managers tend to underperform.  But that's okay, I'm sure your customers are much better at picking direction than all those pros.

  • "You can achieve huge leveraged gains by buying options during
    expiration week, when premiums are extremely low. And now, with the new
    Weekly Options, there is an expiration week every week."

Wow.  Yes indeed.  Good thing you are so good at picking direction because the nay-sayers would tell you that's it's a great opportunity to lose 100% of your money in a hurry.

Did you know that the 'extremely low' option prices are accompanied by exceptionally rapid time decay?  I suspect you did know this, but chose not to mention it.

Buying Weeklys?  Leveraged profits are nice.  What about 100% losses?  Or do you stop yourself out of these trades after 2 days?

  • "You can profit from the strong tendency of the market to
    trade in well-defined ranges most of the time with a carefully selected
    option premium selling program." 

Well, which is it?  Are we to buy or sell these options?  You must tell us now, before we actually go out and make the trades suggested earlier. 

Or is this this another example of making option trades when we know how each stock is going to perform?

  • "You can profit from the huge volatility around events like quarterly earnings reports."

And do we do that by buying or selling the 'huge volatility' displayed prior to a news announcement?

  • "You can profit by buying call options on stocks that are in
    long-term uptrends, at much lower dollar risk than buying the stock."

Agree.  I hope you are referring to ITM options, and not suggesting that traders buy OTM, or even ATM options.  I assume that your readers are good at judging which stocks are in firm uptrends.

  • "You can profit in all market environments by trading multiple
    option strategies on highly liquid exchange-traded funds on
    broad-market indexes, like the QQQQ."

Okay, but you wanted investors to buy calls on the good stocks and puts on the decliners.  How does trading an ETF allow for that?  Now they must predict market direction for the whole market, rather than for individual stocks.  So, does that mean all the advice given above is no longer valid?

  • "In the long run we may all be dead, but we can make the most of the
    short run by looking to the options market for our trading

Yes Bernie, all those opportunities are present.  But how do your readers know when to buy (or sell) puts or calls?  You neglect that one little detail.  Or are they supposed to buy your costly newsletters to get the answers?  

In my opinion, options are designed to reduce risk.  Neither buying options nor selling naked options is the investing method that gives trades the best chance of success.  A jackpot possibility – yes, it provides that.  But that's no different from gambling and I'm disappointed that you shared these inconsistent thoughts with the world.

  • "A good place for you to start might be our Options Center,
    where every trading day we slice and dice what's happening in the
    options market and its implications and where you can also find a wealth
    of options-based tools and filters and explanations of various options

I truthfully don't know how good this information is.  But, it may probably worth a look. 

Bottom line: This is the type of guru advice offered to the average options trader.  This is the type of advice that gives options and options trading a bad name.  If you want to gamble, follow the advice offered by our guru.  If you want to use options with the chances of making a profit on your side, then understand how options work, make good trades, and carefully manage risk.


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Common Misconceptions when Trading Options


think the newsletters know that to justify the monthly fee they have to
come out with monthly trades. What fun would a monthly fee be for a
service that did 90 to 120 day condors and adjusted periodically? Turtle
vs. the hare from an excitement standpoint.

I think everyone starts with front month until they either realize it
takes too much time and stress to monitor or they get sideswiped.

I now would rather place a 100-point RUT spread and adjust
around the halfway mark
[MDW: I have no idea what that means], rather than riding it all the way up to the cliff.
Not to mention a few better nights of sleep and lunches without having
to update my quote screen on the mobile.

I understand your point of not chasing loss prevention thru additional
spreads. However I do like ratio trades during adjustment even though I
have heard both sides of the argument. If I can readjust a position from
say a 35 delta to an 11 on a far out spread and keep full profit intact by selling a few extra contracts, it seems to work well.



This is a good comment Jason, and offers points that should be discussed.

Newsletters can recommend a new 90-day condor every month, along with commentary on how the two open positions are doing.  What's wrong with that? Investing is not supposed to be exciting.  But unless it's exciting, they may not sell subscriptions.

Jason, IMHO you have some misconceptions. Please let me know what you think.

1) Traders begin with what they know.  If they are true novices, then front-month becomes the obvious choice.  It's the most actively traded and offers rapid time decay. 

If they take the time to learn before they trade, they become educated enough to make a rational choice.  For most traders, choosing front-month is both a reasonable and rational choice.  But that is not true for you or me.

2) When you roll to a new position (for example, your 35-delta spread to an 11-delta spread) – you have zero profit to keep intact.  What you are trying to do is roll the position without paying any out of pocket cash.  That's why you are willing to sell a few additional spreads. 

That convinces you to believe that the original profit is intact.  In reality, you exited the original trade – probably at a loss.  It's gone. 

You also opened a new position – one that has the same profit potential as the original trade – plus enough extra profit potential to recover the loss incurred when rolling.  Profit potential is not profit. At least not yet.

To clarify, I believe that you hope to earn just as much on the new trade as you hoped to earn on the original, and you are keeping the hope intact when rolling.  The good news is that current risk is reduced, giving you a better chance to earn that profit. However, it's going to take additional time and reduce your annualized ROI.  And don't ignore the extra trading expenses incurred to roll the position.

3) Here's something I don't understand:

a) Perhaps you have a 100-point wide RUT iron condor, and the adjustment point occurs when RUT moves halfway up the cliff.  That means your short is now 50 points ITM.  I cannot imagine that is how you trade. 

b) Perhaps I completely misunderstood and you really mean that you would adjust when your short option is 50 points OTM.  Thus, if an index is trading at 1,000 and you sold the 800/900 put spread, you would adjust at 950 (half of the 100 points from 1,000 to 900).

I find this baffling.  Your adjustment point – the place at which you get uncomfortable with risk – depends on the FOTM option bought?  When you own 800 puts, 950 becomes the adjustment point?

That does not feel right either.

Something is very unusual here.  Neither of these adjustment ideas seem reasonable.

c) When you have a different position (which I assume is the low-premium, front-month iron condor), you 'ride it up all the way to the cliff.

I don't understand this philosophy either..

If being 50 points OTM makes you uncomfortable for your longer-term iron condor, why is there no similar discomfort point with the front-month trade?  If 50 points seems too far OTM to trigger an adjustment for front-month condors, then 20, or 10 points ought to trigger an adjustment.  There should be some spot to adjust.

The fact that you have no adjustment and just let it ride makes me believe that you are using the cash originally collected to determine your comfort zone boundaries and adjustment strategy.  I have written about this many times, and I believe that is a big mistake.

When managing risk, you own a position, and you own it right now at its current price.  Only one thing matters:  Is this a position you want to hold?   It makes no difference when the trade was opened.  Do you want to own it today?  It makes no difference how much premium you collected.  You either want to own this position, as it exists right now, with the current risk and reward potential – or you don't. 

If you don't, then don't hold it.  If you refuse to make an adjustment because it would result in a loss, you are going to take the maximum loss on many such positions.  There is no way to survive over the long term if you ignore risk.  Solution:  adjust by reducing size, closing the whole position, or making an adjustment that gives you a spread that YOU WANT TO OWN.The feeling that locking in a loss is a bad thing – that's a misconception.  One that will do you harm over the years.  Taking a big loss by refusing to actively keep risk under control – that's a bad thing.  That's to be avoided.

Advice:  When you make a trade, write the price in your trade journal and then forget it.  Manage risk for the future.  It has nothing to do with the past.

I understand that many traders have the mindset that tells them that profits are good and must be sought at all times.  That means never taking a loss willingly.  It's a loser's mindset. 

Try this mindset instead: Large losses must be avoided. Period.


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Selling a Call Option: What do you Get?

Once again a reader (thank you Debi) asks about something that goes beyond the typical education received by option beginners.


1) Let's say I bought a call and the underlying stock
moved down, dropping below the strike price. I could salvage
what is left of the contract by selling the entire position. How much
could I possibly get from trying to close the position early?

Is it
better to just wait until the end and hope for a miracle?

2) If I buy a call and the underlying stock moves higher, I sell the
option and make a profit: the difference between the price I paid and its current price.

I am confused. Do I get both intrinsic
value gain and the difference between what I sold it for and the
premium. How do you know what you sell it for?



1) It is seldom 'better' to hope for a miracle.  When all you can salvage
is $0.05 or $0.10, then you may as well go for the miracle.  Otherwise, selling the call option at a loss is a smart move.  It will not be the winning move 100% of the time, but on average you will be better off selling.

The questions are: when to sell and how much can you get.

When to sell

You bought the option for a reason.  You anticipated the stock would make a favorable move.  It doesn't matter what the reason was: if you change your mind and no longer believe the stock is going to make the move, or you believe the move has already occurred, sell the options.  There is no reason to hold them – and watch time decay kill their value – when your reason for buying the options is no longer valid. 

Repeat: You buy an option for a reason.  Do not hold that option when that reason no longer applies.

You must anticipate many losing trades when you buy options.

How much you can get depends on three factors:

a) Time.  If there is not much time remaining (when you change your mind and decide to sell), the premium is less (yes, that's obvious).

b) Stock price.  I'm sure you understand that the father below the
strike price, the less you receive. The option delta offers a
good estimate of how much lower the option price will move – if the
stock declines by one more point – today.

c) Implied volatility.  Some options (volatile
stocks) trade with a higher premium than options of tamer stocks.  If
you paid a relatively high price because this is a volatile stock, you can recover more cash than when the option is for a non-volatile

Bottom line: No easy answer, but selling when you change your mind is the correct approach.  There is no reason to wait.

2) The simple answer is you 'get' the current price.  You 'paid' what you paid.  The difference is your profit (or loss).

First, Let's be certain there is no confusion over terminology.  The 'premium' of an option is the price of the option.

Some traders mistakenly use the term 'premium' to represent the 'time premium' in an option.  The 'time premium' is the total premium (option price) minus the option's intrinsic value.


A stock is trading at $53 and the Jul 50 call is $4.20

Intrinsic value = $3.00 [$53 (stock) – $50 (strike)]

Time premium = $1.20  [$4.20 (premium) – $3.00 (intrinsic)]

Premium = $4.20  [option price]

When you bought the option, you paid a specific price (premium). 
When you look at the current bid/ask quotes for the option, you know
you can sell at the bid price – and perhaps a little above that

That's the best way to know what you can get when selling the option.  I assume by 'what you can get' you are referring to the price.  One word of caution:  It is best not to enter a 'market order.'  You will do better to use a limit order – just be certain it's a realistic price.  When selling, that means it should be nearer the bid price than the ask price.

If you just want to estimate the price you can get without seeing the current
market quote, then, you 'get' the current intrinsic value of the option
PLUS an unspecified amount of time premium. 

If expiration is nigh, expect that time premium to be less than if there were more time remaining.

If the option has a high intrinsic value (the option is far in the money), then the time premium is also reduced.

Regarding the confusion: 

In theory:

a) You do get the increase in the intrinsic value of the option

b) But you lose some time premium for two reasons

Time passed since you bought the option, and you pay for that time decay (theta).

The intrinsic value has increased.  Options with higher intrinsic value lose time value. 

It's difficult to explain in a sentence, but that residual time value is based on the likelihood that the option will move out of the money (if the stock tumbles).  The higher the intrinsic value, the less chance of that happening.  Thus, time value is reduced.

Bottom line: NO.  You do not get both items listed in your question. 
You get (i.e., the cash you can take to the bank) the current premium (price). 

Debi, you get ONLY the difference between your purchase price and sale price (less commission).  That is true for all types of trading.  Options are no different.  You can break up the option price (premium) into its component parts, but that is unnecessary. 

When you see the price that you can receive when selling the option (the bid) calculate the intrinsic value and the remainder is the time premium.  Based on your question, I believe what you want to know is: How can you determine the profit (or loss).  And that's the difference between price paid and price sold (then subtract commissions).

I hope you are familiar with the terms used.  If you are still uncertain, please request a clarification.



Lessons of a Lifetime, an electronic book (.pdf file).  My 33 years as an options trader.

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Learning to Trade Equity Options

Reading other blogs, I came across a post from OptionClub.com.

I tried to post a comment, but it was not accepted.  Thus, I reply here.  I don't want to be accused of taking material out of context.  Please read the entire entry. 

I know there are many methods a mentor can use to educate investors who want to learn about options.  Some beginners accept minimal information and quickly learn on their own.  Others require a thorough knowledge before being willing to invest one dollar.  All we educators can do is offer the material in a manner that we believe suits the individual trader. 

When writing books and blogs, I present information and opinion in great detail. believing that the rookie deserves to understand what is being taught, and not merely be given a set of instructions with no idea how to think about trading.

I do not claim that is best for everyone.  However, I take a strong exception to those who tell a rookie almost nothing and expect that person to go out and trade.  But sometimes the expectation is even greater.  The suggestion in the blog post is for the newbie to make a few trades and then revise the trade plan.  What trade plan?  How is that novice supposed to formulate a plan, let alone revise it?

The OptionClub post was written in response to this question: "Just what do you have to do to learn how to actually make money in this
trading business?"


Chris makes many valid points, including the idea that an education is the foundation of the trading business.  And it is a business, not a hobby.

Where we disagree is in the practical advice offered.  He wants readers to make a plan and practice trading – with real money.  He dislikes paper trading.  His reasons make sense – for someone who is not a novice trader.

He cautions people to trade one- or two-lots, to learn, and then revise strategies as needed.

Paper trading allows a trader to encounter a myriad of situations, with an opportunity to follow a trade to its conclusion.  By keeping records, the learning process is accelerated.  Imagine owning a real one-lot position and not knowing what to do.  It's much better to avoid the panic of being concerned about money.  The newbie's task is to learn about options and discover how the chosen strategy works under real market conditions. and make some decision, see how it works out, and then decide if it was a good idea. 

The difficult part is learning to recognize 'good' and 'poor' decisions.  The temptation is to allow the results – profit or loss – be the final arbiter.  Good or bad should be based on the soundness of the decision.  That's beyond the newbie's ability at the moment.  But record-keeping, discussions with the mentor, and a multitude of practice examples results in a more transforming the novice into a new trader with some decent experience.

My reply to the question posed above:  To learn how to make money, you MUST first understand options.  Your goal is not to earn cash from the git-go.  If you accept that goal, then there is no point in using real money when your objective is to practice and learn. 

Telling people to go trade is the wrong approach – in my opinion.  Trading when you don't know what to do is absurd.  Making a plan when you don't know the nuances of options is an impossibility.  That's where experience comes into play.

Once you believe you have an understanding of how option prices move up and down (by practice trading), then you can adopt a specific strategy and practice until you believe you understand well enough to invest a small sum of cash in a position.  But there is no urgency.  Learn first, trade later. 

If the new trader learns well, he/she is better positioned to earn profits.  When the original focus (per the questioner) is on making money, then the focus is not where it should be – learning about options.

The response made no mention of risk management, adjustments, exits and various other decisions that a trader must learn.  How can a trader 'revise' strategies when he/she cannot get enough meaningful experience?  How can a trader survive when risk management is not presented as a necessary consideration – right from the beginning? 

I understand that there are many different ways to gain an education and many methods for teaching.  I'm not picking on the OptionClub.  I merely found this blog post worthy of comment.

To me, one of the big problems with option educators is that too many give beginners what they seek – confidence and the incentive to get started too soon.  But they fail to provide enough information.  There are too few details.  Too little guidance. 

I recommend reading, asking questions of people who can be trusted, and paper trading.  I recommend patience.  There is no substitute for seeing trades play out in real time and being forced to make a decision on how to manage the trade.  If the trader does not know when trouble looms, risk is high, or enough profit has been earned, how can that person be expected to make a good decision?  It becomes guesswork.  Winning traders do not make guesses.

Learn first.  Paper trade.  Understand how to limit risk (and it's not by adopting a strategy of buying options).  Even when there is no real cash at stake, to the serious student, the experience has everlasting value.

My response to the blog post:


Understanding the basics of options and how they work is essential.  We agree.

Making a plan?  How is a trader who has zero experience with option strategies supposed to make a plan?  That trader would have a difficult  time choosing which options to trade when establishing a position – how can that trader plan for contingencies?  Impossible.

How can that trader know when to take profits or exit when in a bad situation?

The idea is to learn about a few strategies and pick one that 'feels' as if you may be able to use it.  Then practice trading.  Yes, in a paper trading account.  The idea is to learn about the strategy – not about whether you would trade differently using real money.  That comes much later.  The idea is to learn how the strategy works.  To learn what has to happen to make/lose money.  To acquire some insight into risk management.

The student must encounter situations when risk is unacceptable and test methods to reduce risk.   The learner wants to get hand's on experience deciding when it's time to take profits or abandon the losing trade. 

That's why the rookie is practicing.  To gain experience.  How can that rookie plan ahead with no knowledge of how to solve potential problems?

As the trader practices, he/she reads more about the strategy. Perhaps from multiple sources.   Read about managing risk.  Practice trading and making trade decisions.   If this strategy is viable – then the trader becomes ready to start using real money trading and is able to make a simple plan.  That is the time to begin trading small size.  Now is far too soon.  If the trader canot earn anything when paper trading, thre is zero reason to anticipate doing any better with real cash.

Steps must be taken in the correct sequence.  Paper-trading for the beginner is one of those steps.



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Believe it: You Always Have Something to Learn

Thanks to a heads-up from Tadas at Abnormal Returns, I found a post with such good advice that I had to pass it along.  This is one of those situations in which I recognize my own failings.   Had I paid more attention to this idea, I know it would have made a huge difference.  I'm passing it along with the hope that readers take this seriously.

David V, at CSS Analytics, subtitles his blog: Use Quantitative Research to Beat the Market. Under normal circumstances, I'd look at that title and move on because I believe it so difficult for anyone to consistently beat the market.

But this post is special to me because it focuses on education.  It also reminds me that I failed to do that hard work, that I failed to strive for greatness and that I took the easy road.  Not everyone has the drive or skills to rise to the top.  But if are talented and diligent, believe these ideas, and truly work at continuing to learn – throughout your lifetime – then the potential rewards are available to you.  If you take the lazy approach, you may do well or you may fail miserably. 

David's path is not easy, but do the rewards justify the effort?  That's your personal decision.  But I know that it's worth your time to read the entire post, but here are some excerpts:

The intelligent person will start out in any given field–whether music,
athletics or academics–as a student of those who are more experienced or
talented. Through the course of “10,000 hours of practice” and a lot of
guided learning, these same students will likely emerge as “experts” in
their field (assuming they have enough talent).

The reality is that they have to always try to improve to avoid
falling behind.

The same thing applies to trading. Big money managers compete against
other money managers, traders compete against other traders. Just when
you think you are good, look out because someone better than you is just
around the corner. You have to always work hard, and try to be one step
ahead–otherwise my friend you are going to fall behind.

Michael Jordan was Michael Jordan because of all of that–and no one ever
hears or talks about the more talented players that never made it
because they were lazy.

For this reason, you are never an expert. No matter how good you are, or
how good other people say you are, it really doesn’t matter. Always
think of yourself as a student–someone who always has something to
learn. You must absorb as much as you can from other experts, and even
question their root assumptions.  Once you become the expert, you have
to learn to question your own root assumptions–because the only people
you speak  to most often are looking for answers.
Those who
never question will not only never find the answers, but they will also
fail to truly understand how things work. This framework has been the
foundation for all scientific progress.

People with lesser knowledge and skills can easily surpass you through
sheer discipline and constant work ethic. You need to know what to do,
and you need to actually do it for”10,000 hours” to really absorb the
knowledge you have accumulated. If you haven’t done or are unwilling to
do that then as a trader you are going to have to mechanize your
trading–because no matter how much you know about the markets, you still
have to know how to manage yourself just as much to succeed.

It's never too late.


My 33 years as an options Trader.  In Lessons of Lifetime, I share some of the ideas I've learned through the years, including my philosophy of trading and how I look at trading, positions, risk management, record keeping etc.

The ebook will be launching within one week, as I'm still in the editing phase.

Lessons of a Lifetime: My 33 Years as an Options Trader is approximately 18,000 words in which I share some of the ideas I've learned through the
years.  that includes my trading philosophy and how I look at trading,
positions, risk management, record keeping etc.

Note:  eBook only; no hard copy available.


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Options and the Real World

It's a privilege to write this blog for a devoted niche audience, and I truly appreciate every kind word that comes my way.

The frustrating part for me is being unable to have my message heard by a much wider audience of investors.  I consider my job to be the dissemination of information.  Once that is done, then each reader can accept or reject any or all of my suggestions/opinions. Or better yet, readers can voice an opinion by making a comment at the end of any blog post:


Each of you already knows that options can be used to reduce risk, and understand just how useful options can be in serving a dual purpose:

  • Protecting your assets
  • Increasing your chances of having a profitable trade

I've reached the point where I recognize there is no use beating my head against a brick wall.  There is simply no way (that I can see) to reach the millions of investors who can benefit from tearing themselves away from stockbrokers who churn accounts and whose commissions are far too high.

Also beyond my reach are people who depend on financial planners and advisors.  Those are the professionals who, in many (but not all) cases collect fees for investment ideas that are many decades old.  Although the investment ideas are not 'terrible,'  they are far less useful than investors deserve.

I plan to preach far less frequently about my frustrations with all those financial professionals.  I get it.  They earn their living by selling what they know to their clients.  There is zero incentive for them to do any better, learn anything new, or even admit to the possibility that there are risk-reducing investment alternatives that can truly make life better for their clients.  They want their fees first, last and always.  I cannot change that.

The new year (but, please: it's not a new decade) is about to begin and I hope to post articles that both interest and educate an audience of experienced option traders, option rookies, and option traders of the future.

I hope each of you had a wonderful Christmas, Kwanzaa, or Chanukkah.


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