Tag Archives | options trading

Educating an options trader

Gaining a sufficient education

The setup: A newbie to the options world is learning about options. He/she picks up certain pieces of information (only those specified) in one sitting or one lesson.

Information packet #1

Let’s assume that you understood this much:

  • If bullish, buying a call is appropriate
  • If bearish, buying a put is appropriate

Education status: Let’s hope that no one believes this information is of much use. Trades made on the basis of this information are likely to result in a loss.

Information packet #2

  • Options are not always reasonably priced
  • Sometimes the trader gets a bargain – increasing the odds of winning
  • Sometimes the trader pays too much – decreasing any chance to earn a profit
  • A reasonable estimate of the fair value of an option can be made

Education status: The intelligent trader knows not to buy calls or puts based on a market bias, but is snot yet ready to begin trading.

information packet #3
Our trader finds a source that explains the basic idea of volatility. Not all the details, but enough to recognize how volatility affects option prices. Enough to recognize that implied volatility (IV) moves from high to low (significantly affecting option prices) in what appears to be a random path. Historical volatility (HV) for a stock is readily available.

Education status:

  • Pay a reasonable price when buying options
  • Understanding the concept of HV and IV allows the trader to trade at more appropriate times and to avoid overpaying for options

Education status: This is enough knowledge to get started – preferably with a paper-trading account. This is nowhere near sufficient, but the trader has a chance to make an intelligent, rather than a random, trade.

The first ‘packet’ was more dangerous than helpful.
The second offers a warning which alerts the trader to proceed with caution.
The third gives the trader a fair chance to pay a reasonable price.
This is enough to enter the game with virtual money.

It is not sufficient. It offers no warning about risk or risk management. The trader stands a chance, albeit a small chance, to earn money.

Information packet #4
Prognostication: It is not easy to predict market direction. Most highly-paid, professional traders cannot do it consistently.

    Personal note: I do not understand why so many people suggest that a trader can learn technical analysis quickly, and with minor effort, and then use charts to predict market direction. Experts tell us that technical analysis is difficult to master, while the hype artists tell us it is a cinch.

    I do not understand why new traders are not immediately taught that being bullish does not mean a stock will move higher. Or that it’s crucial to buy the right options. Or that ‘technical analysis’ is neither easy to learn nor universally accepted.

This information packet is seldom available. Students ‘learn’ that chart reading is easy to master. They believe that being bullish leads to easy profits. This harms most students by providing false confidence.

The truth: Trading is difficult. Making money is not guaranteed. There is no reason to pay high prices for an education.

Education status: Teaching beginners to rely on graphs is harmful. Learning that market prediction is often a waste of time makes a big difference by helping the trader face reality.

Information packet #5

  • It is a bad idea to buy OTM options
  • Buying options requires good timing, as well as picking direction
  • Earning money when buying options is a difficult task. Not impossible, but difficult

Education status: This is more than enough for most people to get started. Unfortunately, it is not the curriculum of many options educators.

The trader who has been exposed to these five packets of information recognizes that the price paid for an option is important and has some idea of how to decide whether the price is reasonable. The newbie learns that there are many factors that go into the decision on buying options. This is more than many beginners get out of their courses.

It is sufficient information. With an idea of when to buy, how much to pay, the importance of timing, the chances of success, the trader’s skill in using charts – a new trader can decide whether to go ahead and spend some time practicing this strategy, or whether to seek another.

Personal note: Far too may ‘educators’ teach so little of what is sufficient and teach only enough to get the novice excited about using options. That works for the educator. That sells more courses and more lessons. The student soon learns that he/she does not know enough to trade effectively, neatly falling into the ‘more lessons’ trap of the instructor.

Students should get sufficient information the first time. Each person learns at his/her own pace, and the time required varies with each person. It is unfair to offer the student too little and then send him/her out to trade.

I’m doing what I can to combat that nonsense, but my efforts are apparently a well-kept secret.

To learn more about my idea of teaching beginners to trade, visit Options for Rookies Premium.

Information packet #6

  • It is mandatory to manage risk with care
  • Appropriate position size is step one in risk management
  • Hedging reduces risk

Does packet #6 add anything of value?

Yes. It completes the ‘sufficiency’ requirement. Enough to make a solid beginning. Lots of practice is required. Skills must be developed and honed, but the student has the background needed for success. Risk management is an essential ingredient of any trading course.

An options education

There are a bunch of well-qualified options instructors. However, some deliberately offer too little – hoping to sell more lessons. Others offer too little because they are not qualified to help traders find success.

When it comes to decision making and the ability to choose trades wisely, too many novices are left to their own devices, instead of being taught the ropes by their teachers.

How is the new trader to judge whom to trust? No beginner knows what it is that must be learned, and is forced to trust the teacher. The truth is that many cannot be trusted.

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Beware of swindlers

On a personal level, one part of the options business that truly bothers me is that it its filled with people who want to take your money. I politely refer to them as hypesters, but a better term is swindler.

Swindle: Use deception to deprive (someone) of money or possessions. (source: Google search)
Fraud: Wrongful or criminal deception intended to result in financial or personal gain(source: Google search)

I don’t know the difference between deception and criminal deception, but these hypsters feel like criminals to me.

These swindlers publish stories that are so outrageous, that I am amazed that anyone on the planet could fall for it. Or is that just me being naive? Tell a good story, repeat it a few times, and the customers flock to you. Maybe ‘flock’ is an exaggeration, but people come to you, begging you to take their money.

There’s nothing special about the options trading business. The liars and cheats are present in every business, dreaming up scams to separate people from their money. It makes me angry.

Here’s one example, chosen via search:

Do you generate less than 20% profit every month in your trading account?… If you answered yes, what I’m about to share with you could change your life forever…

That profit can vary but if you do it right you should be able to generate at least a 20% profit each month – yea that’s right, I said each MONTH.

I don’t know whether to laugh at the nonsense or cry for the victims. He says you SHOULD be able to generate AT LEAST 20% EACH month. And how do we accomplish this miracle: By writing covered calls. If he were to say that it’s possible to earn 20% when things go your way for an entire month, I’d agree with the statement. But ‘should’ and ‘each’? Has he never seen a down market? Does he believe that VIX is always 100?

It’s beyond belief. But I’m sure he sells his costly software and courses to the gullible. $1,000 invested for one year, growing at 20% per month compounded, becomes $8,900. Do it for six years and you’d earn one half-billion dollars.

Sure, I omitted commissions and assumed taxes could be paid with other funds, but here is someone who would have you believe that this is the minimum result you SHOULD anticipate. How can making these statements not be against the law?

I recently claimed that a skilled options trader – someone who exercises good risk management skills has a reasonable chance (but it’s not a cinch by any means) to earn 20% in one year. Mark, who blogs at option pit recently held a webinar through the option club.com and suggested that 13% is a reasonable annual expectation. So who is to be believed? The 20% per month boaster, or two experienced traders and teachers?

The Banks also play the game

It’s not bad enough to be cheated by random individuals. What chance does the naive person have when the banks openly overcharge for structured products- or options in disguise. One simple example is described by the Amsterdam Trader.

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Options Trading for Monthly Income

One of the premium features of Options for Rookies Premium is ‘Track that Trade’ – from entry to exit. That has already brought questions about how the entry point and the underlying asset should be chosen.

My thoughts on that are clear: I don’t have the ability to choose stocks that will perform as hoped. Thus, I trade index options. However, a recent post by Dan offers his advice on how to begin the stock selection process.

How To Find Good Monthly Income Vehicles

Many people spend lots of time researching for vehicles to trade. I like my students spending most of their time practicing and perfecting the various income strategies. Here is a simple 3 step process I sometimes use to find good candidates for monthly income trades like calendar spreads, credit spreads, butterflies, condors and covered writes.

#1 List 10 stocks you would be willing to buy 100 shares of for little Guido’s college fund. Typically these are good solid stocks you would buy in your retirement account.

#2 Filter this list by excluding stocks under $55. This gives you stocks with a bit more time premium.

#3 Filter the list again by only including the stocks with implied volatility levels between 17-27. This filters out many potential psycho stocks! This information is easily available from your brokerage platform.

Here is a sampling of stocks or ETF’s that have implied volatility between 17-27 and that are over $55:

KO GLD SPY PM ACL IBM XOM UPS AZO CVX MMM DIS IWM V GS NOC WLP FDX GOOG CAT

This is not an exhaustive method, merely a simple one. The merits of this method is that it doesn’t require computer training or a Harvard education!

***

For readers who do not understand the suggested limitations, here’s an explanation. Please remember that Options for Rookies Premium is devoted to the education of rookie traders, and readers who have many years of experience know how to handle a wider array of variables. For the newer trader, using familiar stocks (or broad based ETFs/indexes) makes for safer (i.e., less risky) trading.

1) It is always a good idea to trade stocks you are willing to own. It is true that you can exit positions prior to expiration and not find yourself owning shares after being assigned an exercise notice on a short put option, but when screening for stocks, it’s safer to concentrate on stocks you would not mind owning.

2) ‘A bit more time premium.’ Why is that important? It’s not universally important. However, if you are trading a small account and thus trade few option contracts per position, commissions can play an important role in your ability to earn money. Thus, if you are trading a one-lot, it is better to collect $200 to $400 for that trade, rather than $60. It’s just a matter of spending less on commissions. [When using some brokers, this is not an issue]

3) The advice to select less volatile stocks is not going to be accepted by all traders. The idea behind this advice is that it reduces the risk of wild price swings and gives the trader a significantly better probability of earning a profit. Note: We are talking about ‘income producing’ strategies. That in turn means that we are selling option premium and own positions with positive time decay (theta) and negative gamma.

The trade-off for this extra safety is that premium collected is reduced. Low volatility stocks have lower option prices than more volatile stocks. To me this is a good practice – but it truly depends on your comfort zone. Rookie traders who are near the beginning of their careers, must gain valuable trading experience to avoid blowing up an account. Less risky trades help accomplish that goal.

I understand that you feel confident and want to earn more money. I don’t blame you – but you get only one chance to be a rookie, one chance to develop good habits, and it would be a shame to go out of business before you get a chance to see how well you can trade and manage option positions.

NOTE: Dan’s thoughts represent a reasonable way to approach trading income strategies. As always, the trader must feel comfortable when following any advice.

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Trading Traps for the Unwary II

Continuing yesterday’s horror stories, Tristan submitted another:

Something doesn’t seem right about this. I was short the 115-116 call spread in SPY 55 times during March expiration. I was assigned on the 115 call (the short part of my spread) on Thursday after the close (found out Friday morning). This resulted in being short 5,500 shares on Friday morning versus my long 55 116 calls. On Saturday, I was debited from my account a significant charge because I was short the shares when SPY went ex-dividend on that Friday.

Am I responsible for the entire dividend payment for that quarter because I was short the stock on that one day of ex? Seems like stealing. I feel like if I had bought the stock that day, there is no way I would have gotten credit for an entire quarter of a dividend payment. Anyone know how this works?

***

“Anyone know how this works?” This is the stuff that drives me nuts. If you don’t know how it works, why are you trading a product where it is essential that you understand how it works?

Dividends are paid on specified dates. Whoever is short on that ex-dividend date pays the dividend. Whoever owns the shares collects. Very simple, very efficient and it has always been this way. It’s also fair and reasonable – for owners of the shares. When the stock (or ETF) pays a dividend, the stock price declines by that amount. Gain the dividend, lose in the share price. No one gains or loses.

Alas, it’s not so simple for option owners. When you own an ITM call option that should be exercised to collect the dividend – WARNING: NOT ALL ITM OPTIONS SHOULD BE EXERCISED FOR THE DIVIDEND – failure to exercise results in a real monetary loss. The trader who submitted the question above did not know about the dividend, did not know he should have exercised his calls, and donated his money to some lucky trader who had been short those SPY 116 calls.

To reply to the comment: You are correct. If you bought shares that day (Friday) you would NOT get any of the dividend. You would be too late by one day.

I do agree with the lamenter’s opening thought. There is something not ‘right’ about this situation. What’s wrong is that you should not yet be trading options because your education is far too incomplete.

More Questions from Tristan

For instance, what to do if long puts are automatically assigned upon expiration

If you know in advance that you cannot meet the margin requirement, then do not allow yourself to be assigned at expiration. BUY THEM BACK before expiration. There is no solution that’s any easier. If you are not short the options, then you cannot be assigned an exercise notice.

or if short legs are assigned in spreads

There is almost never any reason to be assigned earlier than expiration (other than exercising a call option to collect the dividend). However, this is a recurring problem for SPY options. It ALWAYS goes ex-dividend on the third Friday of the month. Not knowing that – in advance – is just a huge mistake. If you fear being assigned on any position, then the answer is very simple (Honest. This is a deadly serious situation) Answer: Get out of the trade. Do not hold to expiration. Ask yourself why would you decide to hold to the bitter end? It is so unnecessary. For goodness sake, get out when you may be assigned and especially when you cannot meet the margin call.

If you are assigned on one leg of a spread, and if margin is not a problem, keep the position. Someone handed you a gift, and if the stock makes a big move (down if you were assigned on a call option or up if you were assigned on a put option) then you will score a nice big payday. It’s unlikely, but it has happened before and will happen again.

However, if you are unable to hold the trade and must liquidate, do not decide to exercise your long option to get out of the position – unless this option has zero time premium. It is more efficient to buy back the short stock and sell your long calls [Or sell your long stock and sell your long puts].

as well as simpler topics such as bid/ask spreads, order types, conditional orders , orders I should place in advance . in case I temporarily go into a coma through expiration, the Pattern Day Trader classification, the same-day substitution rule, Regulation T, etc.

There is a lot of stuff on your list. The truth is that most people have no need to understand most items on the list. That raises the question that concerns you: Why are people allowed to trade when they don’t understand the rules? And how do you know what it that you must know when there is no one to provide a list.

The answer to the first question is easy. They are allowed to trade because it is profitable for the brokers. Nothing else matters.

There’s not much that the average trader can do about the items on your list. If he/she becomes a pattern day trader (not a common situation), that’s when he/she will learn about those trading limitations.

Most beginners have no need for conditional orders and have plenty of time to learn how to use them.

However, bid/ask spreads and limit orders are essential items. I assume that anyone who teaches options classes or writes books for beginners includes that information. Traders who jump right in with no education may have some painful experiences when entering market orders. Not everyone can be protected. Would you open an account and enter orders with no advance study or preparation? Of course not and there is no protection for those who do.

You have one advantage. You are aware that dangers exist, and although you may not ask every question, you will be frightened enough to ask questions about any situation that occurs to you. That may not be enough – but you would have to be very unlucky to not have discovered what you need to know when you aware that you don’t know what it is that you don’t know.

Some answers

Don’t pay the offer; don’t sell the bid.

Never never never use a market order. Limit orders only.

There is no need for fancy order types. Limit orders and stops (I don’t like stops for option traders) should be sufficient.

Buy back shorts when they get very cheap – just in case you do temporarily go into a coma through expiration.

The Pattern Day Trader classification is not a concern, unless you day trade. And if you do, you will soon learn the limits.

You can get much of this information from your broker. But get it in writing. The people in customer service may be as bad as your correspondent found them to be (yesterday)

The CBOE stories scare the living daylights out of me — I wonder what these traders were supposed to have read to understand/avoid those problems in the first place. It is not asking too much to know when a stock/ETF you are trading goes ex-dividend.

It really seems like trading was designed for people who have a Series 7 broker’s license and know all these nuances.

I understand how you feel. The bottom line is that people are trading – and they intentionally did not bother to learn the rules. They make bad assumptions and get stuck with the bill. When you sell a call option, you must know that the owner is allowed to exercise at any time prior to expiration. It seems to be a natural question to ask – why would anyone exercise early? That’s when the trader would learn bout dividends.

You may be frightened, but it seems to me that you are taking care to learn about lurking dangers.

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No one is forced to trade. Information is available to everyone.

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Managing Iron Condors with Imagination

This post is based on the very thoughtful comment/questions posed by Chris O.



Dear Mark,

I have been thinking lately, If one always exits an IC early, say one month before expiry on an IC that was opened three months before expiry, is it useful to do the following:

As the short legs of the IC ought to be closed one month early and I want to discipline my self to do so, why don’t I select my protection, the long legs of the IC, at one month earlier expiration.

Such wings of the Condor are cheaper to buy. The wings of an IC chosen the normal way, extending to the same expiration, are mostly worthless when I sell them one month before expiration, together with buying back the short legs of the IC.

So using shorter duration long legs on the IC takes away any hapless covering of the entire IC, and allows me to make more money?
Looks like Free lunch = I must be overlooking something.

Not so free lunch

This is not a free lunch, and there is likely to be significant margin problems. However, the strategy has a great deal to recommend it.

You envision an iron condor similar to the following:

Buy X INDX Jul 1050 calls
Sell X INDX Aug 1040 calls

Buy X INDX Jul 880 puts
Sell X INDX Aug 890 puts

Your long options expire before the short options. This has a lot going for it, per your description above. However, the margin gods don’t like such positions. When the long option expires after the short, they are considered to be naked short. That uses up a ton of margin for the average investor.

Portfolio margin

However, if your account uses portfolio margin, you are granted many special advantages regarding margin. Such accounts are margined by looking at the overall risk associated with the portfolio – and not by looking at each individual position. The bad news for many is that the account must be at least $100,000 to qualify. But readers should ask their broker about portfolio margin, just in case they do something different. [IB follows the rules mentioned here]

Forced exit

If you want to ‘discipline yourself’ to exit one month early, this is certainly a good way to do it. However, do keep in mind that when INDX is near 880 or 1050 (the strikes of your long options), the longs are going to expire worthless and it is going to cost a lot of money to buy back your shorts.

Nevertheless, that specific result will not occur very often and over the longer-term this may well be a winning play. This trade allows the position to be opened for a large cash credit, and there are obvious benefits in doing that.

1) one spread, put or call, might be too close to the money and have to be bought back at a loss or a additional wing must be bought for that side to cover a short position during this last month. Does not make sense as an argument, I want to stick to the rule of closing the short legs on month before expiration, so closing at a loss is “biting the bullet”. I definitely don’t want to stick around in a high gamma last month environment with a short option close to the money, even when it has a long option covering to the final month.

Yes, it makes sense to me. However, I urge you to take the worst case scenario, estimate an implied volatility for the August calls, and get yourself a good estimate of how much can be lost. If you size this trade properly (that loss is acceptable, not devastating), then you will be in good shape when using strategy.

It’s easy to back-test, if you have the data. Or you can accumulate data in a paper trading account. To gain data quickly, do three different indexes simultaneously.

2) IV might have jumped on the underlying, and both short options may have higher value than I collected – even with one month to go. Does not matter? If IV is so high I don’t want to remain in the last month when gamma is also high. Wild swings can happen. So again, why bother buying wings on an IC when the plan is to carry the IC to the final expiration?

Are long legs of an IC carrying to to the last expiration date worth anything, one month before expiration at a high IV?

Yes, it matters. Yes, IV may become a problem. And yes, those one-month options would have a very high value in your high IV scenario.

However, a low IV offers an occasional extra profit. The key to survival here is being very careful about position size.

There is a point you are missing. If you own the traditional iron condor in a high IV environment, one month prior to expiration, your remaining long call would significantly cut the loss when exiting. But, as you say, your plan is to earn extra profit all those times when IV is not extra costly and your long option is not near the stock price. Probability is important for a good analysis of this play, and having he ability to back-test this method for a bunch of years would be helpful.

3) I am trying with a small position, now running until final expiration in May, at Interactive Brokers and see little effect on margin requirements. No argument either.

Can you shed some light?

Thanks a lot for your efforts

I don’t understand why there is no problem with margin. Please let me know if you are using portfolio margin.

Do keep in mind that there is little to be learned from a single example. You can develop some novel adjustment ideas, but this study requires a good deal of data.

Chris-O
Holland.

P.S. On Options for Rookies Premium, is the planned content difficult to organize for people in a very different time-zone than yours?

[Visit the link above for a short video that describes live meetings (and the problem of time zones), one of the important features for Gold Members. You must become a free member (Bronze) to gain access to the video]

Yes, different time zones present a problem when planning live meetings. We already have members from Hong Kong, Singapore, and the Netherlands. Therefore, I am requesting that members suggest times that are best for them and I’ll do what I can to make it convenient for as many as possible. If necessary, I’ll add extra sessions. For now, I’m promising four live sessions per month, but I suspect it will have to be more than that.

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Why Trade Options. Part II

Excerpts from an excellent post from Sean (the minimalist trader)

Breaking News: Markets are risky.

Ok, you knew that. You wouldn’t be here if you weren’t already permanently scarred by a bad beat at least once in your career.

Today, a new element of risk has been introduced via market structure. The May 6th flash crash was the first headline advertisement for what surely has become a topic on every active traders’ mind. Stories proliferated around that time of traders who got blown out on that day, and investors who’s way-out-of-the-money stops were triggered, only to watch their stocks swiftly rebound to a more normal price. And even to this day, it seems at least once a week some random stock has its own mini flash crash as a result of some computer gone haywire or a cascade of triggering stop orders.

Traders and Investors are rightly concerned about this, and some are downright scared. It puts many of us in awkward positions. We all know we should trade with stops firmly in place, but in this new marketplace it seems putting a resting stop order on the books is practically an invitation for some HFT [High Frequency Trading] stop-sniffing algo to hunt it down and force its execution. So do we then just put in mental stops? Seems like a logical jump, but that method is fraught with all kinds of its own headaches: What if I’m not at my desk when the trigger is hit? How do I exit? What if I’m frozen in a panic-stricken trance? It happens. Believe me.

For all these reasons and more, this is why I trade options and why I think options trading should become a bigger part of your trading arsenal.

Options trading has always been a useful tool to express a market opinion.

I utilize them because I can define risk. This is especially important when taking speculative, risky, or news-driven positions. This is simplicity in managing risk. And this is why I like options and feel that options are an essential tool for any Minimalist Trader.

Sean’s fears are very realistic. We’ve seen the system break down, and although I’m more confident than he about it the severity – the next time it happens, there is no way to be certain.

Just one more reason for using options.

Stop orders

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Why Trade Options. Part I

A recent article by Mark Hulbert (MarketWatch) attracted my attention for two reasons. One, it focused on Richard Russell, “the granddaddy of the investment advisory industry, having continuously published his Dow Theory Letters advisory service since 1958.” Two, it brings into focus the advisability of owning a large stock portfolio – the main investment method since the end of WWII.

Edited (for brevity) excerpts from Hulbert’s article:

Richard Russell made a remarkable confession earlier this week. He said that he finds the financial markets to be so inscrutable that trying to time them is close to futile. He decided to invest a good chunk of the accounts he manages in a mutual fund that has a static allocation to several uncorrelated asset classes.
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My Philosophy 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


One on one

When working with a trader one on one, 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.

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 education.  This is not a topic suitable for experienced traders only. 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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