THE OPTIONS COURSE- Options Trading: A Primer


Options Trading: A Primer

Trading is an elusive beast to the uninitiated, filled with mystery and complexity. Although trillions of dollars’ worth of stocks, futures, and options change hands every day, learning to trade is a complicated puzzle that takes patience and perseverance to navigate effectively. Perhaps you have a friend who has made money or know other friends who have lost money playing the markets. Learning to trade can be the beginning of an exciting new career, especially if you master combining options with futures and stocks.

Many years of teaching and trading have taught me that the most successful investors are those who do not think of trading as work, but as play. Obviously, a love affair with anything you do will increase your chances of success dramatically. Perhaps that’s why I like to call what I do “grown-up Nintendo.” Making money is just a natural consequence of my daily play.

My systematic approach to trading emphasizes risk management. I know how to spot optimal moneymaking opportunities to increase my chances of high returns from low-risk investments. I share this trading knowledge with individuals throughout the world through seminars and various innovative products designed to foster a strong foundation in options trading in the stock and futures markets.

Stock, futures, and options trading provide investors with the best opportunity to find rewards that satisfy almost anyone’s financial objectives. My investment philosophy is to make money any way we can, in any market we can. It’s a matter of working with a matrix of trading strategies, developing a feel for how to trade profitably, and learning the tricks of the trade.

What separates those investors who make consistent returns year after year from those who can’t ever seem to make a winning investment? Vision. Simply put, the winning investor has the vision to systematically spot good opportunities, while the losing investor simply never developed this insight. Can this vision be developed? Some say that a great investor has an innate sense that drives his or her ability to make money. However, I believe that although there may be a few individuals with this innate sense, most great investors learn by trial and error until they find what works best for them.

For example, many people refer to Warren Buffett as the greatest investor of all time. He appears to have a knack for turning anything he touches into gold. Is it because he is just so much smarter than everyone else, or has he developed a methodology over the years that works for him on a consistent basis? For someone as successful as he is, I would have to say that he has both innate skill and a formula for success. This formula for success can be developed by anyone. The problem is that most investors don’t have the persistence and drive necessary to achieve success. First and foremost, you have to learn how to invest and trade the right way. Typically, most new investors lose money when they first begin due to their lack of understanding of what it really takes to succeed. 

Many may listen to their stock or commodity broker from the outset and never develop an understanding of the markets. Many more lose money until they realize their main error is taking someone else’s investment advice. A word of caution: Just because someone is licensed to take an order and execute a trade does not mean that person has the knowledge to invest your money wisely. Gaining the right kind of knowledge, however, is critical to trading success. Although there is risk in virtually all investments and trades, you can mitigate risks by learning how to protect yourself using innovative option strategies. Once you learn how to manage risk, the rewards come more easily.

If you intend to enter the markets, you’ll need to decide what kind of investing/trading you want to engage in. Keep in mind that there is a big difference between investing and trading. An investor is an individual who takes a long-term perspective. For example, if you have $5,000 to invest and you place all the money in a mutual fund—a pool of investments managed by a professional manager—then you are taking a passive role for the long term. If you choose to set up an individual retirement account (IRA), you will more than likely keep it until retirement. A trader, on the other hand, takes a more active role.

Traders may make investments that last for seconds, minutes, hours, weeks, or even years, always looking for an opportunity to move the money around to capture a greater return. Typical traders actively make investment decisions on a continuous basis, never allowing anyone else to control the funds. As a trader, you need to focus on strategies that provide the best chance to create profitable trades. Combining stocks or futures with options provides you with extra leverage; but this extra leverage is a double-edged sword. Options give you the chance to make a very high return using smaller amounts of cash than futures or stocks require, but this leverage also creates an opportunity for you to lose money just as fast.

The losing traders are those who do not respect risk. To survive in this business and have the opportunity to enjoy the fruits of your labor, you must develop a very healthy respect for risk. Before entering any investment, you should ask yourself four questions:

  1. How much profit can I make?
  2. What is the maximum loss I can take?
  3. At what point will I get out if I am wrong?
  4. When should I take profits?

As you make the transition to becoming a motivated, knowledgeable, and successful trader, you will have to undertake a realistic examination of your personal goals, habits, dreams, and dislikes. This step is of utmost importance. Many individuals believe that they will enjoy a certain profession, but then give up before the opportunity to achieve success appears.

You must have a good understanding as to why you want to participate in any endeavor. Why are you taking the time to learn a new profession? What are your goals? What are your strengths? What are your weaknesses? Before you can become a serious and successful trader, you need to search for these answers. Make a list and add to it every day as more things become apparent. Try to be honest with yourself. Keep your highest goals in mind and work toward them one step at a time using your list of attributes to strengthen your willpower to succeed.

The three primary reasons for developing trading savvy are:

  1. To achieve more wealth. The number one reason that most people want to become traders in the stock, futures, and options markets is to attain financial rewards. Stories about the large sums of money to be made and the successes of the rich and famous inspire a desire to achieve the same level of financial success. Just as it is a business’s objective to produce more cash flow to pump up the bottom line, a trader’s objective is to make more money from money. That is how a trader monitors progress. Although “money doesn’t buy happiness,” having plenty of money sure helps. However, there is no need to make having money your sole goal in life; as far as I’m concerned, that would undermine your development as a well-rounded individual.
  2. To improve family life. The ultimate goal, other than trading just to make money, is to create a better life for yourself and your family. The success I have been fortunate enough to achieve through hard work has allowed me to help my family and friends financially when they needed it; I have found this ability to help others very enjoyable. Once you have achieved a financial level where you can live each day without worrying about which bills need to be paid, you will have more freedom to discover your true purpose in life. As an added bonus, you can also afford the time and energy to help others, which will make your life as an investor even more fulfilling.
  3. To gain greater autonomy in the workplace or be your own boss. The third most common reason is the desire to break away from a day-to-day job that has been emotionally and/or financially unfulfilling. This is the main reason I started trading; I needed more than what real estate offered. As I like to ask my seminar students, “How many of you are here to try to get out of a real job?” More often than not, it’s better to describe the day-to-day grind most people subject themselves to as an unreal job, since many cannot believe they have to go through the motions each day. In essence, it has become a nightmare.

Whether you enjoy what you are doing today and just want to supplement your income, or you are looking to become your own boss, there is no better profession than that of a trader. For example, I travel extensively and live in various locations. With a small laptop computer, Internet access, and a cell phone, I can conduct my business from almost anywhere, which maximizes my freedom. For me, trading is a dream come true.


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