Trading Iron Condors for a Living

Hi Mark,


I'm Roberto from Italy, sorry for my bad English.


I want to thank you for the professional advice that you give to us.  It's very useful; I bought your "lessons of a lifetime" and it's very
useful too, thanks again.


I know options trading since 2006, but I made very few trades in the
real market, losing a couple of hundreds of $. I take a break from the
real market and go back to study, and I realize that I always need to
study!


My question is: in your opinion it's possible to live by trading? Do you
live by trading? Do you know someone who lives by selling iron condors?
And last but not least, do you know some hedge fund that operate in
options, especially iron condors?

Many thanks from Italy.

I follow you every day.

Roberto

***

Buona giornata, Roberto

Thanks for reading the blog, and there is nothing wrong with your English.  Yes, the education process, or the need to study, is something that does not end.  Just think about how professional athletes – Tiger Woods for example – always practice. 

Yes, it is possible to live by trading.  But, it is difficult.  The very first truth is that you must prove to yourself that you are a profitable trader – consistently – before you give up your job and try to trade for a living.

Here is the part that most people fail to recognize:  Novice investors believe they can quickly easily to make enough money to support themselves and their family.  Why would someone believe that to be true?  If you want to determine if you can do it, then you must first make money by practice trading.  That means  using a 'pretend' account, or paper-trading.  If you are successful, and ONLY if you are consistently successful – then is the time to think about trying to trade for a living.

If you cannot make money in this account, there is no reason to believe you can do better with real money.

Next consider your bankroll.  How much can you place in your account and still have enough to meet your daily needs – just in case you don't make any money right away?  Next consider your rate of return.  If you can earn 20% per year, consistently, then you would be a very successful trader.  Some people do far better.  Most do not.

Putting all that together, if you have $100,000 to invest and if you earn 20% per year, can you live on $20,000?  Probably not.  And don't count on earning that 20%.   It's not available to most traders.

You tell me.  Can you make a living as a trader?  Are you willing to devote the time to practice?  Do you have enough cash?  Are you alone, or do you have a family to consider?

If you can meet those difficult barriers to entry, I guarantee that the number one factor that will determine your success (or failure) as a professional trader is your ability to manage risk.  That means you must trade without emotion.  All decisions must be ruled by logic.  You cannot get greedy and you must act decisively when your positions get into trouble. On the other hand, you cannot just take a loss every time the market makes a small move.  Can you do that? Can you handle the pressure?  Practice and find out.

Get started

Practice trading.  Do not use real money.  Open a few different iron condors at one time and manage them.  Take this process seriously – do not look at this as 'only' play  money.  To you, it must seem to be real money.  Succeed at that – and you have a chance. 

Roberto – you may be able to do this.  But not everyone can.  That's why you must know how good you are before making the commitment.  You do not have to be the best.  You just have to be good enough to make enough to meet your needs.


Your questions

I do not live by trading alone.  My positions are not large enough to earn enough cash, unless I get very lucky.  And that's fine.  I am at the stage where I cannot afford the risk. 

Many people claim to live by trading iron condors, but I do not personally know anyone who does that.

There are hedge funds that trade iron condors.  I don't know the names of any.   I suggest that you do NOT pay someone to trade iron condors for you.  That includes hedge funds.  They take 20% of the profits, plus  more in fees, and there is not nearly enough profit left for you.  Most hedge funds require that investors be wealthy before accepting them as clients.

I just published a page that discusses the topic of getting started as a trader.  You may find it helpful.

790


Lessons_Cover_final

Lessons of a Lifetime:  My 33 Years as an Option Trader,


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38 Responses to Trading Iron Condors for a Living

  1. Jesse 09/17/2010 at 5:46 AM #

    Hi Mark and other traders,
    I’ve to say I’m really lucky to have read Mark’s Book “The Rookie’s Guide to Options”. After having digested Mark’s materials and paper trading for a while, I gradually found MY OWN comfort trading strategies which are selling cash secured puts and covered call writing, no more and no less. Yes, I’m consistently profitable every month for over 1 year in stock option trading and making very good returns (now I’m making regular monthly contributions to 10 charitable organizations and I’m feeling really good). Frankly speaking, the contributions are in very small amounts, hopefully, I can make some significant donations in the future.
    Thanks again Mark.

  2. Alec 09/17/2010 at 7:15 AM #

    “Many people claim to live by trading iron condors, but I do not personally know anyone who does that.”
    I think a lot of avid readers of this blog aren’t going to like hearing that! 🙂 IC’s make a great addition to an options portfolio but trading them exclusively for a sizeable yearly income would be difficult (not to say impossible, however).

  3. Simon 09/17/2010 at 7:29 AM #

    Roberto,
    I understand your eagerness to trade for a living as I have been where you are now and have to agree with the sentiment of Marks post in saying the road less traveled is a difficult one. Not to say it can’t be done, as I am doing it now, however ICs are not my sole strategy but do make up the majority of my portfolio.
    I wrote a piece that may interest you that was published in Expiring Monthly. it outlays the process I went through in becoming a trader and most importantly reflects on the dedication and commitment required.

  4. Alec 09/17/2010 at 7:38 AM #

    I think one method that can lead to the eventual goal of becoming a full time trader (as obvious as it sounds), is for aspiring traders to set realistic $ goals that are modest and then gradually increase that and raise the stakes. Goal setting is important, but they must be realistic and achievable. Ofcourse capital must be protected at all costs and the temptation to over-trade must be avoided. Paper trading is mandatory, but eventually the aspiring trader must step into the pool, and start with the shallow end.
    IMHO, the technical side of trading can be adequately mastered, but most traders will lack the mental toughness over the long term, outside interferences will inevitably get in the way. Just my thoughts, Cheers!

  5. Mark Wolfinger 09/17/2010 at 7:47 AM #

    Jesse,
    Small contributions are appreciated by the recipients.
    I thank you.

  6. Mark Wolfinger 09/17/2010 at 7:51 AM #

    Alec,
    My personal friends and family are not option traders. The few who are are not trading iron condors. I just don’t know anyone who does this. I know of people who claim do it, but that’s not the same.
    I agree. Trading them exclusively is probably too risky for most. Using them as part of a portfolio makes more sense. But it also takes money to make money. Many of my readers are beginners who don’t have high 6-figure accounts.
    Regards

  7. Mark Wolfinger 09/17/2010 at 7:55 AM #

    Simon,
    This job takes training.
    Maybe not as much becoming as becoming a doctor, but the idea is the same. Book learning first, then practical training (paper-trading may be considered the equal of cadaver work). Then working under the guidance of others (ok, this part is optional, but helpful for traders), then considering yourself to be a qualified professional.
    It takes time.

  8. Mark Wolfinger 09/17/2010 at 7:57 AM #

    Alec,
    Good thoughts. Thanks for sharing.
    One part that is difficult to grasp is that someone with a $20,000 account cannot expect to make a ‘living.’
    It is not realistic to think that anyone can earn double, triple, quadruple the size of the account per year. Yet, some people act on that assumption.

  9. Joe 09/17/2010 at 10:29 AM #

    Mark,
    I would guess even with a sizeable acount, great management skills and experience, it would still be very difficult to consistently earn enough to trade for a living. Yet there are many experts preaching just this.

  10. Mark Wolfinger 09/17/2010 at 10:40 AM #

    Joe,
    When you have something to sell – newsletter or costly consultations – you have to give people a reason to buy.
    Sadly, the truth is often ignored.
    1) Yes, it’s not easy with a big account. With $250k, a trader has a reasonable chance to earn 5K per month – which may not be a fortune, but it is ‘a living.’
    2) With a small account there is zero chance. Many beginners start with $2k or $5k. Yet there is the idea that they can earn thousands every month with that tiny account.
    I am careful to tell readers that those are not only unrealistic expectations, they are unachievable by more than one person in one million.
    Regards

  11. Steve B 09/17/2010 at 12:20 PM #

    Roberto,
    Here is a very practical way to see how you stack up. Figure out your monthly need to live on. So as a fictious example, lets say $5,000 per month to support yourself. Divide that by the number of trading says in the month, we’ll use 22, and you need an average daily gain of $230/day to make $5,000 a month. Put that into a spreadsheet and open up a paper money account. Track your daily P&L gains/losses and see how you stack up after 1 month, 2 months, 3 months etc… It will not take long to tangibly see how you do day in and day out. Be sure to be realistic with your opening balance on your paper money account. If you only have $10K to start with, don’t open a paper account with $200K.
    I have done this exercise and though I have been consistently profitable each month, I have fallen way short of my daily goal each and every month. So it builds confidence to see the consistency, but also a dose of reality to know not to put that two week notice in just yet.
    Also, as a personal aside… there are probably very few people who only trade for a living. Even if they could, they have other streams of income as well i.e. articles, classes, books etc…

  12. Mark Wolfinger 09/17/2010 at 12:37 PM #

    Steve B,
    Your advice is excellent FOR A DAY TRADER.
    It has zero to do with trading iron condors. ZERO.
    1) Time decay is not steady and there NO DAILY GOAL when trading iron condors.
    IF IV drops, you make lots that day. If it rises, you lose. Because IV effects (and market movements) are 100% outside the control of the trader, it would be foolish to measure results daily and then conclude that the trader’s ability can be measured by the numbers.
    No. This method is 100% inappropriate for option trader. 100%.
    2) There is only a PROFIT PER TRADE goal. Success can only be determined after the trade is closed. But that too is dependent on how the market moved. There is no way that a daily P/L tells you anything at all. A complete waste of time.
    3) The ONLY way to measure skill is to KNOW that you exercised risk management techniques during the month. It’s those skills that count.
    It’s very difficult to know whether you made a skillful decision, or one that was poorly chosen. All you can do is look at months in which you did more than simply open and then close the iron condor.
    How did you fare during those months? Do you believe the ‘adjustment’ trade was good? Did it save money? Did it cost money? Even then, you have the market determining whether the adjustment was good.
    Measuring ability takes far more than counting cash. Anyone who started trading iron condors 4 months ago must believe he/she is a genius. Nope. The market gave us perfect iron condor conditions and they are likely to disappear soon.
    Anyone who began trading iron condors in Sep 2008 probably thinks the strategy is a total disaster.
    Results do not determine skill. Luck must be separated, and that’s not easy to do.
    Steve – I’d like to hear more from you on this topic.

  13. Steve B 09/17/2010 at 1:42 PM #

    Mark,
    I think we need to differentiate between using a daily P&L to determine if you are a successful trader and using it to determine if you can make enough money today to pay your bills tomorrow.
    For the former, I totally agree, the P&L is a useless tool as there are too many factors outside of the traders control that determine the profitabily per day. All you can do is to set up your trade and let the market do its things.
    However, the original question was can you live by trading. The secondary question was can you live by trading IC’s. If the question/goal is to use trading to pay 100% of your bills, I think time is a crucial element. An outstanding profit per trade does me no good if I have to wait 7-8 weeks to see it. I’ve had my water turned off and been evicted by that point.
    I agree, ability is not measured by cash, but ability also does not pay the bills. If you want to trade for a living, you would almost need some sort of daily cash strategies. Quick trades that you are in and out of in 1-2 days, not 1-2 months so the daily P&L could be used to measure that success.
    This suggestion was never meant to be a great tool for gauging your progress as a trader or for gauging the success of trading ICs. In fact it is utterly useless for those two things. It is merely a very simple tool to see if you can live day by day solely on trading.
    John Carter says that one thing that is necessary to keep a professional traders state of mind is to NOT focus on money. But if your dinner that night depends on your trade that day, that is all you focus on. My opinion, but that is probably why most traders have other streams of income for necessities, so they don’t have to focus on money.

  14. Mark Wolfinger 09/17/2010 at 2:36 PM #

    Steve B,
    I understand that Roberto broke the questions into segments, but I believe that the meaning is clear: He is referring to trading iron condors and not day trading. And that is how I replied to his question and your response.
    I disagree violently that the only way to ‘pay the bills’ is to become a short-term trader.
    Some of the skills required by one are very different from the skills required by the other. For a simple example, a short-term trader MUST be a technician. The options trader does not have to pay any attention to charts. Sure most do, but it’s not essential.
    If I were relying on trading as my only source of income, there is nothing that could convince me to trade short-term. And I want to be certain that anyone who reads my blog understands my position on this.
    If you can successfully day trade, that’s great. But why would you encourage a beginner, possibly someone who knows nothing of the markets or technical analysis to jump into day trading? That game is essentially gambling from my perspective. If you have an edge, if you have a proven system or a proven ability to profit from chart reading, then go day trade.
    But from my perspective I would never tell anyone to begin trading OPTIONS that way. Never.
    If the ability to feed yourself depends on that day’s success, you have NO BUSINESS being a trader. You need a bigger bankroll and some cash in reserve. That is gambling in its purest sense.

  15. Roberto 09/17/2010 at 2:54 PM #

    Thanks for the replies,
    glad to see that this is an “hot” argument, and averyone has it’s opinion.
    I did paper trading during the past year, using IC on some indexes like RUT, OEX, SPX, OSX, SOX, UTY and XAU.
    In 12 months the results it’s overall positive, and with 10k $ (paper), at the end of the year, I realize a profit of 2000 $ approximately.
    I don’t know if this is “consistant” and “continuos” as Mark said in the original post, but the time of period choosen by me it’s August 2008- August 2009.
    I simply stick to my trading plan (thanks to MDW and his precious advices on the “comfort zone”), if things go wrong, I close the trade, my trading plan doesn’t involve adjustments. Overall I have to say that the biggest loss is when I refuse to accept a loss that becomes even more bigger.
    Point is: according to my trade plan, my IC is open one month, from 70-60 days left, to 30, so that should ensure a “monthly” income.
    Obviously I wouldn’t trade with the money I need for dinner, only trade with money I can afford to lose. The idea was to have a trading account and a cash account, and at the end of the month, hopefully transfer money from trading account to cash account.
    To sum up, I am 25 yrs old, and hope to make this my job.
    Regards, Rob

  16. Mark Wolfinger 09/17/2010 at 3:02 PM #

    Roberto,
    Thanks for update.
    Earning 20% your first year is a wonderful result.
    Congratulations.
    You are at a good age for learning and for discovering if this is a good job for you.
    Regards,

  17. simon 09/17/2010 at 3:30 PM #

    Rob,
    Sounds like your going about it in the right way, as your account grows continue being patient and disciplined whilst building on the your risk management skills.
    All the best,

  18. Fran 09/17/2010 at 4:16 PM #

    Hi Mark,
    great debat once again.
    You said,
    “But why would you encourage a beginner, possibly someone who knows nothing of the markets or technical analysis to jump into day trading? That game is essentially gambling from my perspective.”
    Well, I agree with you, but don’t forget that options trading is essentially gambling too… like blackjack if you prefer, a simple game of chance.
    Thanks and regards from Spain.
    Fran.
    http://www.ventadeopciones.com (Mark, check out my spanish version of OFR and test your spanish skills :-))

  19. Steve B 09/17/2010 at 5:58 PM #

    Hi Mark,
    I am not encouraging anyone to jump into day trading for a living, especially a beginner. I apologize if that is how it came out. That is financial suicide. So again, I do apologize.
    I was merely trying to give a visual cue as to just how hard trading for a living can be. How large your trading account has to be, how consistent your return has to be etc… Instead of looking at it on a daily P&L, you could say that on a $10K trading account, he needs to earn 50% each month to be able to live off of. Is that not a true statement if we stick with the $5k month income each month to survive?
    Or, you can look at it and say that given his performance last year of 20% gain, his trading account would need to be $300K in order to generate $60K a year in livable income. Again, isn’t that a true statement as well?
    How obtainable are those goals for someone who makes 20% per year on a $10k account? In the short term, not very. That doesn’t mean 20% on $10K is not excellent, it is awesome. And I would take 20% every year. But will it allow you to quit your job? Not by itself, no.
    For me, the daily P&L isn’t a tool I use to gauge my trading nor would I ever recommend it for that purpose… it is a constant reminder that a few good trades and $5K in the trading account doesn’t equal the commute to the computer. I wasn’t trying to use it to advocate day trading for a beginner or even that short term trading is the only way to trade for a living. It is just a very visual slap in the face of reality for me that trading for a living requires more than a few profitable trades every few months. It requires solid consistent returns and a very large trading account. So that keeps me able to focus on just learning and practicing, knowing the ultimate goal is still quite aways away.
    But after reading Roberto’s latest post, I am confused. When I think of trading for a living, I don’t think of only wagering money you can afford to lose. To me, that is a hobby, not a living. So I may have a different definition of what trading for a living is to some people. My goal is to do exactly what Roberto says, pay the bills with consistent income, use your trading money to buy all of your toys. But again, to me, that is not trading for a living.
    I personally think trading for a living, in its purest sense of your trades are your one and only source of income to pay your bills, is extremely, extremely difficult. When I said that trading for a living by default needed some short term strategies in it, I was working under the assumption that the trader does not have 6 months of living expenses in the bank, and a $100K+ trading account to work with. But it was truly a person who needs to be able to take cash from the trading account starting at Month 1. I should have clarified that up front. I apologize.
    But I have enjoyed the debate. I learn so much from this. Thanks Mark. I hope you have a great weekend.

  20. Mark Wolfinger 09/17/2010 at 7:15 PM #

    Fran,
    I have no Spanish skills to test. I took some French and German in school. But it looks good. I do know how to translate ‘DrawDowns’
    I don’t deny that anything related to statistical outcomes can be described as gambling. But I like to believe I have an edge – not a large edge – but an edge when trading.
    The edge can be the sale of over-priced options when hedged with less overvalued options. Or it may simply be the ability to manage risk well.
    The day trader goes long or short and is right or wrong. If he/she has an edge it comes from being able to predict the future based on technical analysis. Beginners have no edge.
    Thanks for posting.

  21. Mark Wolfinger 09/17/2010 at 7:29 PM #

    Steve B,
    Thanks for the ‘great weekend’ wishes, but it is Yom Kippur, a day of atonement and fasting. I’ll save those wishes for next weekend.
    No need to apologize. I get emotional over the bad information that rookies receive. the Internet is filled with hypesters who want to take their money – in exchange for nothing of value.
    I also recognize that just because I have an opinion, it does not mean my idea is best, or even that it’s correct. I’m trying to educate the rookie trader and offer good guidance.
    Sure we can agree that $5k/month is a ‘living’ – and in some parts of the world, it’s a fortune. And I want Roberto to understand that 20% is a very good return. The problem is: It’s his first year and it’s natural for him to believe that he will do better next year. That is not likely.
    The good news is that at age 25, if he can get a job and earn 20% per year on this 10K, with compounding, by the time he is 40 years old, he would have $154k – and that’s without adding one penny to the account over the years.
    He could retire and continue trading full time.
    Steve, you understand the game. You sound as if you have the patience to allow money to accumulate. That’s all good news.
    Regarding Roberto: Don’t be confused. He is not trading for a living NOW. He is using money he can afford to lose. That’s intelligent. If he decides to trade for a living, then I’m sure he will have more funds, and that it will no longer be money that can be lost. He is doing the right thing, right now.
    I agree that ‘trading for a living’ means that you use income from trading to pay all bills and other, voluntary expenses. If anyone has outside income, that does not disqualify that person from trading for a living.
    Good discussion. Thanks

  22. Roberto 09/17/2010 at 8:16 PM #

    I do realize that 20% per year it’s a very good return, and for sure I do know that it’s not gonna be like this forever, but I want to clarify that 10k $ it’s on my paper trading account, and that when I will begin to trade on the real market I will use only the money that I can afford to lose.
    If and when things will works, I’ll make a serious thought about increasing the amount of $ invested, and that’s the point when I prefer not to lose the account! 🙂
    Mark is right: I’m not trading for a living now, but i would like to do that in the future, like all of us I think.
    Thanks to all of you for your thoughts.
    Roberto

  23. Mark Wolfinger 09/17/2010 at 8:31 PM #

    Roberto,
    You have a good plan.
    I wish you the best.

  24. Fran 09/18/2010 at 1:08 AM #

    Roberto,
    do you know Thinkorswim options backtest tools? They’re very useful in order to test how your strategy works in any market environment.
    Mark,
    thanks for your words about ventadeopciones.com
    Do you know this Thinkorswim tool? I’m sure that a comment about it could be interesting for your rookies, you bet.
    Regards
    pd This is not spam. I’m trading with IB and I only use TOS for testing my strategies. It’s a prize issue.

  25. Roberto 09/18/2010 at 6:11 AM #

    Hi Fran, I have a couple of friends that uses TOS for trading, but I don’t.
    As well as you I have IB, but use Optionetics for paper trading and calculation.
    Regards
    Roberto

  26. Mark Wolfinger 09/18/2010 at 9:39 AM #

    Fran,
    I have not spent much time with TOS tools, and am very unfamiliar with them. Yet I believe all the traders who say that TOS has the best tools.
    I also use IB.

  27. Alec 09/18/2010 at 11:34 PM #

    Absolutely Mark, sorry if that comment seemed like a hit on you, we’re all grateful for the tremendously informative blog 🙂

  28. Alec 09/18/2010 at 11:53 PM #

    Absolutely agree Mark, thanks.

  29. Dave 09/19/2010 at 12:50 AM #

    I’d like mention (many here already know this) a very treacherous hazard to consider during the quest to become professional: The confidence of having known success at most everything you’ve aspired to accomplish.
    This one really got me. To the want-to-be pro trader it can be a supreme curse. You’re talented, smart and motivated with huge desire. And there’s that “track record”… Be careful, it’s a sweet desert recipe to a real professional (your competition).
    Be honest with yourself– mostly about what you don’t know– and learn learn learn (this site is the right place).
    To recap: The market will spank anyone with an out sized ego into a quivering mass of jello. Previous successes doesn’t mean squat, so forget about them.
    And, paper trading is fine to learn the mechanics of it all but don’t imagine for a millisecond it’ll prepare you for trading’s toughest challenge– the battle of emotion.
    I do believe once you get the hang of it (took me 10++ years) that 20% annual is on the very low side of realistic. I’m sitting around 34% right now and it’s been a year of horrific mistakes… if I’m being honest.
    GL Roberto!

  30. John 09/19/2010 at 5:20 AM #

    Just wanna add a bit of my 2 cents. I think a lot of rookies give too much emphasis on track record and backtest results. As someone who has done trading for quite some time (not a long time as I’m about Roberto’s age), I think neither of those is important. As Mark has mentioned long time ago, situation changes all the time and you cannot backtest humans’ emotion. The ‘edge’, as a lot of traders like to put it, has to be structural, not theoretical or indicative as in the case of fancy backtest results. Backtest results is good marketing material for the gullible, but it is not genuine advantage.
    Mark, I wanna thank you for being so truthful and upfront about your thoughts on living on trading IC. I too, have benefit greatly on your advice. Apart from my opinions above, I do have a question to ask. Do you know where I can learn more about liquidity and execution. I envision one day I will have difficulty getting my positions filled smoothly as my position size grows, perhaps something along the line of 100 contracts. I am thinking about ways of tapping into huge liquidity. I trade spreads on RUT by the way. I am asking this in advanced as I remember you mentioned that you may quit blogging in a few years time.

  31. Mark Wolfinger 09/19/2010 at 10:46 AM #

    Alec,
    Not a hit on me. Thanks for your support.

  32. Mark Wolfinger 09/19/2010 at 10:54 AM #

    Dave,
    You certainly out-earn my by a wide margin. But it’s just a number that is difficult to compare with those of other traders. It’s the risk-based return that counts and I have no way to compute that.
    If you take three times my risk (and I am not saying you do, it is merely an example that numbers don’t tell the whole story), then you can keep your 34% and and I’ll stay with less risk. That’s not to say that I’m not jealous, but things are what they are.
    I’m no longer a full time trader and cannot expect to do as well as in previous times.
    Paper trading serves a purpose. If you cannot be profitable in that arena, you will NOT be profitable when it is even more difficult.
    Most readers will not believe that it can take years. We are all after instant gratification – and it’s just not available here. But I appreciate your sharing that fact.
    Regards

  33. Mark Wolfinger 09/19/2010 at 11:07 AM #

    John,
    Backtesting is okay for examining the viability of using a specific strategy under specific conditions. But not cherry-picking situations is necessary. I do not believe it tells you anything about your skills as a trader. Thus, we are in agreement.
    Liquidity and execution: No I don’t have any information. If you ask a true day trader – someone who frequently faces that issue, you may get a better answer.
    If you are trading RUT, I doubt you will ever find a size that is too large. However, that means trading active options – front month, and near the money. I don’t believe 1,000-lots have any difficulty getting filled. And if they do, trading SPX would fix that problem.
    However, if you are like me and trade some 2- and 3-month options – especially OTM options, I don’t know how to solve your problem. I have received partial fills of one-lots on some RUT iron condor orders. I cannot imagine some indexes having the volume to trade only one-lots, but there’s nothing I can do about that. I’d rather have one than zero, so will not use all or none orders.
    I think it’s a bad idea to shift to more liquid options if they would take you out of doing the trades you want to do. I don’t have a solution, unless it involves developing a strategy that takes advantage of highly liquid options.
    Not planning to retire soon, but my age tells me I cannot continue for a long time.

  34. Dave 09/19/2010 at 8:17 PM #

    My disdain for paper trading is because it’s really such a very tiny and easily debated step to the real thing. But I completely agree with you- if an aspiring trader can’t find success playing make-believe there’s no point moving on. If someone has more time than money (is that really even possible?) I say sure then; get out the Monopoly cash.
    On the other hand, there’s nothing quite like a lesson burned into the brain from a painful loss. IMHO losing “real money” can be a great way to learn.
    In fact part of becoming a good trader is learning to lose when losing is the right thing to do (not that uncommon). And taking a loss is never easy, but I guarantee it feels a lot better with fake money than your own– so how does that prepare the student for real life?
    LOL, everyone gets an opinion so here’s mine: I think a young trader like Roberto should be playing with the hard stuff. Blow up an account or two. Maybe three– and pay attention and learn. THAT’S how you become a good (maybe great) trader.
    Mark, that 34% is total account, not risked-based. The year is young and there’s still plenty of time to screw it up but thanks in a huge part to what I’ve learned from YOU I’m pretty confident that won’t happen… Many many thanks!

  35. Mark Wolfinger 09/19/2010 at 9:24 PM #

    Dave,
    Obviously there are pros and cons. Look at it from the perspective of a rookie. How about using it just to get familiar with your broker’s trading platform. We don’t want to get any spread orders backwards. For example, the nomenclature for buy vs. sell for an iron condor can lead some astray.
    I like paper trading for serious people who understand that it’s not a game.
    Yes losing real money should be a true learning experience, but sometimes there are no lessons. Sometimes it’s just a good trade gone sour.
    I like the ‘practice’ aspect. Learning to think under duress. When a good decision must be made ‘now’ and when a trade plan has not been made in advance (common occurrence), the ability to juggle choices and make a good one is valuable – real money or not.
    But I know that people say that’s it’s only play money so ‘I’ll take a chance or double the position.’ These people cannot gain much, if anything, from paper trading. But that attitude should be a warning that trading may not be for them.
    If someone comes to the game with some cash, it’s fine to trade 1-and 2-lots to get started. It’s real experience. But the player with $5,000 cannot afford those $100 and $200 losses. They represent too much of the trading account.
    Dave – just recognizing that the loss must be taken – play money or not – is a big step. If the trader -to-be understands that hoping for a market reversal or a return to getting even on the trade would be a bad choice – that is truly a learning experience.
    I believe it depends on the person’s personality and desire to learn. The dedicated, serious trader takes practice seriously. The cocky, overconfident beginner has no chance anyway, and being unable to paper trade costs that trader nothing.
    Yes, I also count percentages on whole account. What I was saying about ‘risk-based profits’ has to do with account volatility, Sharpe ratios and other stuff with which I am not sufficiently familiar. It has nothing to do with margin (which I what I believe you believe I said). Those who take more risk have a big opportunity to earn larger rewards. Large rewards does not necessarily mean large risk.
    I appreciate the kind words. Send people to visit the blog. [Click on a couple of ads as a thank you.]

  36. John 09/20/2010 at 11:34 AM #

    Thanks for the reply. The problem with spread is that the order is sent to the market maker who supposedly provided the best price. On the retail front end, I can’t see the market makers’ quotes. Do you know how to connect directly to liquidity (in a way that I can see MM’s quotes)? Another method I can think of is to come out with a good algorithm for legging in. This is much complicated and I hope I would not need to go this route. My opinion is, in order to get into more liquidity, I may need to learn how to trade like a MM.

  37. Mark Wolfinger 09/20/2010 at 12:32 PM #

    John,
    I have some comments. Full post tomorrow.
    Regards

  38. jon 02/08/2014 at 2:21 AM #

    anyone who started trading in 08 successfully should find that their strats work only because we are in a bull market.still being in a bull market, ive found that naked strangles work pretty well if they are sold 1.5-2std otm. you can adjust the position size for direction. so far ive been generating around 2% a month. $120-$150avg, some months $200+ for a 6500 acct to start. how this strat will fare in a bear market? who knows? all i know is that for the last 6 months i’ve been consistent. i think its viable to trade for income and i plan to do this once my account is bigger. the big thing is to not overtrade more than you have cash to back it up with. the only time a position wont work is if you have a huge breakout, i.e 40+% sudden move. usually if its gradual, you can adjust your positions to compensate. pretty simple strategy, has worked consistently for the last 6 months. will see how it fares through the upcoming bear market. the other thing is to trade underlyings that you like or those that don’t have 30-50% swings in a 30 day period.

    Nice work. Going forward, you can sell naked calls instead of puts if and when you are satisfied that the bear market has arrived. And if your broker does not allow naked calls, sell call spreads (which I prefer to do anyway).

    Thanks for sharing.