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Trader’s Mindset Series II. Always Collect Cash

In the first part of this series, I wrote about beginners who ask the wrong questions, such as: 'How much can I expect to earn when trading options?'

This time I'd like to continue on a theme that began yesterday. That theme can be simply stated:

There is a subset of option traders who seldom, if ever, are willing to pay cash.  All  initial trades, all adjustments, all rolls – must be made at a net cost of zero or less.  The only exception occurs when exiting a trade and collecting a profit.

Opening the trade

When selling premium, it's natural to begin by collecting more cash for options sold than you pay for options bought.  And those who sell naked options never think about buying protection or limiting losses – because it cannot be done for free.  The following discussion of this specific trader mindset refers to trading spreads rather than naked options, although the principles are the same.

The opening trade is easy.  The traders wants to collect a cash premium and choose one of a bunch of strategies that enable him/her to do that.

Managing the trade

This part is more difficult.  If all goes well and time passes, then the option values decrease and may eventually reach a point that our trader is willing to spend a small sum to exit the trade.  However, it's likely that the position will be held, hoping all options expire worthless.  Paying a few nickels to exit a trade and eliminate all future risk is not a popular idea.

One of the problems with this mindset occurs when the market does not behave in a manner that is friendly towards our trader's position.  Premium selling and negative gamma are close relatives.  When the market goes against  a position, further moves increase the rate at which losses increase and the position becomes more dangerous.

Traders with a more normal mindset: "This position requires an adjustment because my current risk is too high and I must avoid a large loss" have no trouble making good trades that reduce risk.  Most of the time these trade involve spending cash.

  • Reduce size and buy back some of the position
  • Buy single options for protection
  • Buy debit spreads for protection
  • Buy…

The strategy tends to be to buy something and spend cash.

However, the trader with the mindset under discussion: "I don't want to pay cash for any option trades.  I do want to prevent large losses, but I will find a way to protect myself with no cash out of pocket" has a more difficult time managing the trade.

Clarification: It's may not seem to be a more difficult time for the trader.  He/she is happy to sell extra premium because it affords an opportunity to make even more money.  However, these traders increase overall risk and do almost nothing to take care of the current problem.

When the market rallies and the position is short too many delta, this trader does recognize the need for making an adjustment.  At those times, the most obvious first choice (for the 'take in cash' traders) is to sell some puts.  That not only adds cash to the coffers, but it adds positive delta.  That's a feel good trade.  However, it's very short-sighted. 

What's wrong with getting some useful positive deltas by selling puts?  Two things.  First, it does almost nothing to reduce the current upside risk. The only upside benefit is to keep most or all of the put premium collected.  However, that cash is not enough to offset the losses that accrue as the market marches higher and negative gamma soon makes the position lose money more quickly that it did before the adjustment.  Second, the position now has risk where none existed – downside risk.  And for what?  For the cash collected to 'protect' the upside.  Selling those puts is not a good idea.

What about rolling?  Surely that's a good risk-reducing technique, says our trader.  Well, 'yes and no' says I.

Rolling works when you move to a good position and exit the risky trade.  However, with cash as the driving force behind the roll, the trader often rolls to a position that is already too risky for an initial trade.  It feels good because it includes extra cash and moves the short options farther out of the money.  As I said that feels comforting.

But it shouldn't.  The new trade is probably so far from neutral that it already requires an adjustment.  That sets up even more risk.  And if the call spread was rolled because of a market rally, and if new puts are sold to balance the new position (turn it into an iron condor), then what about those now FOTM puts from the original iron condor? Prudence dictates paying some price to get those puppies off the street, but our intrepid cash collecting trader does not think that way.  In fact, in his/her mind those have already expired worthless and that, in an of itself, reduces the bath being taken on the call side of the trade.

Then there's the situation when rolling isn't good enough.  It's necessary to pay $6 to buy back the (now ITM) call spread and the most reasonable place to roll (to collect lots of cash) is a spread that trades near $4.  Most credit spread traders do not sell 10-point spreads for $4 when the idea is to watch the options expire worthless.  They are far too close to the money.  But the trader with the cash is king mindset will sell 3 spreads for each two bought.  That allows him/her to roll the position at even money (buy 2 at $6; sell 3 @ $4). 

Immediate risk is gone and the shorts are no longer ITM.  However, this is a very short delta position, had a potential loss that is 50% greater than the original, and is likely to create additional problems.  Rolling for a cash credit may feel nice, it may make the trader falsely believes that no loss has been taken and that there is still a good chance to collect the entire premium – but it's a hollow belief.  The truth is that risk has increased.  That is not the path to survival as a trader.


This is the easy part for most traders.  Take the profit and move on.  To the cash is king trader, buying in cheap options is a waste of money and the trader believes that options were made to expire worthless.  Another misconception and dangerous belief.

If the mindset described fits you, please at least think about modifying the way you think about trading options – to something more reasonable.



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Trader’s Mindset Series I. How Much can I Earn when Trading Options?

Over the past week, I've encountered a group of questions and comments from traders that tells me that traders have a certain way of viewing the world.  These each represent part of the Trader's Mindset.  I've already responded to some of the questions, while others remain on the 'to do' list.

Today I'll tackle one of those questions:  How much can I expect to earn when using options?

I plan to reply to each question and will group them as part of the Trader Mindset Series.  Taken together, they represent how one  trading professional, but psychology amateur, views the psychology of how trader's think.


I understand the thought process behind today's question, but it always disturbs me.  It's just the wrong question.  It would be better to ask any of these:

  • How much time should I expect to devote to my options education before expecting to earn money?
  • How much cash do I need before opening an options trading account?
  • Do most new option traders find success?  Or do most give up?
  •  I've never traded stocks or anything else.  Will that make it difficult to learn to trade options?
  • Should I learn to trade options or pay someone else to trade for me?

These questions  demonstrate that the person who wants to become an options trader recognizes that this is not a gimmie, and that some time and effort must be expended before rewards can be expected.  The commonly asked question: 'How much can I earn?' suggests to me that the person asking 'knows' success is easy, and that the only thing holding him/her back from joining the game is wondering whether it's worthwhile. 

I seldom, if ever, receive a question along these lines: 'What does it take to succeed?'   It's always similar to: 'I'm going to succeed.  How much can I make?'


A recent letter from Jo:

Hi Mark,

Is it possible for an ordinary person to generate income from trading options if they are able to sustain themselves for a few months without a job while they learn the ropes? How much can one hope to earn through trading options on the conservative side, and how long does it take to become an expert on average?

Is it necessary to purchase special software for options trading (technical indicators and such)?

Thank you,



Yes.  It can be done.  You can generate income.  However, when you 'need' the money for living expenses, it often places too much pressure on the investor/trader to succeed, and succeed right now.  That added pressure can will lead to poor trading decisions.  I know you understand. And that's why you plan to have 'a few months' cash in reserve.

The good news is that you recognize that profits do not begin from day one.  The not so good news is that you are asking whether it's reasonable to learn enough to make a living – during those few months.  The first answer is that every student has a different ability to learn and some just have a better aptitute and can understand how options work more quickly than others.  So yes, it is possible to produce earnings within that time slot.  But not everyone can move that quickly.

To succeed, you must understand what you are trading, and that means taking time to learn options basics. You should have no trouble understanding that options are different from other trading vehicles.

But I must warn you that some traders never get the special characteristics of options and mistakenly believe that they can be traded as if they were stocks. Options are different.  Not difficult to understand, but they are different. 

If you are brand new to trading, that means there is even more to learn, including basic things such as how to enter an order, how to use your broker's trading platform, the different order types (market, limit, stop etc.).  Someone with stock trading experience is already familiar with those items.


In addition to how options work, the trader must possess (or be able to develop) certain personality traits.

Jo, if you are willing to learn how options work, and if you believe you can demonstrate the traits listed below, then you may very well be able to succeed.  No guarantees.

I do want to mention one important point.  if you expect to make money (income) by buying options and then selling them for profits, let me tell you that this is an almost impossible path.  When earning an income stream, the methodof choice is to adopt specific option selling strategies – all with limited risk.

Anyone can trade.  Anyone can enter the arena and place his/her bets.  But to have a chance of making money on a consitent basis, the trader must have

  • Discipline
  • The ability to recognize risk
    • how much money is at stake for a given trade
    • the probability of losing money
  • Patience to learn before trading
  • Patience to practice what you have learned, usually in a paper-trading account
  • Ability to control your feelings.
    • Fear leads to panic, which results in terrible decision making
    • Greed has you taking too much risk for too little reward
    • Pride has you refusing to recognize that you made a bad trade and must accept a loss
  • Recognize that a few successful trades does not make you a star trader
  • Understanding that you cannot make money every month
  • Understanding that low probability events do occur – just as statistically predicted
  • Recognize that a 90% chance of winning means there is a  very real 10% chance of losing
  • Accept the fact that you cannot make much money when you only have a small sum to invest
  • Knowledge that luck plays a role, and your job is to manage risk when luck is bad

Now, to your Question: How much can you make?

If you trade high risk strategies, you have a chance to earn a large sum (10+% per month), but that comes with a very high probability of going broke.  High rewards come with high risk.

If you are more conservative (as you are), you may try to earn 'only 2-3%' per month.  That's a very good return. Most professional traders cannot earn that much.  Brett Steenbarger once told me that the best professional traders earn 'in the low (emphasis on low) double digits' per year.  That sounds right to me.

Going by that, earning 1% per month is a realistic target.

However, to give you a better answer, I must ask: How much cash do you have for trading?  This is a key question that most beginners ignore.  They assume they can earn the same amount of money, no matter how much cash is in the account.  This is a huge fallacy. Why?  When you begin with a small sum, the risk of ruin, or the probability of going broke, is very large.  When you have extra cash, you can withstand a string of small losses and still stay in the game.

Also: When you have a small accout, if you have outstanding success and double the account in one year, the total dollars earned is small.  It does take money to make money.

Thus, I repeat, how much cash do you have?  If you have $10,000 and can do an excellent job and earn 2% every month, that's a grand total of $200/month.  That will not take you very far.  I assume you would want to earn a minimum of 10 to 20x that amount.  To do that you would have to take big gambles.  There's a chance that you could have a nice win streak and quadruple your money in a year or so.  But the most likely outcome of seeking such huge returns is the loss of all your capital.

Yes Jo, you can do it.  If you have the patience.  If you take the time to learn and are not rushed into trading.  And if you have sufficient capital to give you a realistic chance.  If you lack the capital, you can still learn and trade part time.  If you grow the account, if you save more cash over the years, if you show the talent and discipline, you may eventually have enough to try trading full time.

I wish I could offer better encouragement, but trading is not a business for everyone.  Being a successful investor can be very rewarding over the years.  Trading full time is different.


Becoming an Expert

On average, far more traders go broke than become experts.  Very few become experts. This question depicts another trader mindset that I believe demonstrates no conception of reality.  How long does it take to become an expert?  A lifetime. 

Experts are few and far between – assuming that by 'expert' you are referring to someone who knows how to make money and then actually makes it and keep it.  With that definition, few are experts.

Trading is a game in which you are continually learning.  And that's important because markets change over time and if you still do whatever it is that you are an expert at doing, eventually it will no longer work and you will cease being an expert.

It is not necessary to become an expert. You do not have to earn more than the next guy.  In my opinion, you can do well (earn decent income) if:

  • You have the ability to understand how options work.  This is not difficult, but some people just don't have the head for it
  • Trade with discipline and overcome emotions.  Fear and greed are harmful.  It takes a while to overcome those and trade with confidence
  • You take the time to practice.  That means using a paper-trading account with fake money.  But to gain useful experience, you must  believe it is real money and trade accordingly
  • If you don't have to win right now, you need the time/patience to learn.  I don't know if a few months are enough.  That depends on you

Technical Indicaors

No.  I have NEVER used technical indicators. I know that some traders are very skilled in doing just that.  But they do not learn overnight, and anyone who tells you it's easy to learn is not telling the truth.

I use no trading software, other than risk management software supplied by my broker.


I suggest getting started by reading or atteding some free seminars.  If you like what you read and hear, if you understand what you see, then go for it.  Plan to spend some time in the education mode.  Especially if you set a few months as the time limit.  There's no time to waste.  I wish you good trading.





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