How the Options Business is Supposed to Work (For Premium Sellers)
I always tell readers that my suggestions are based on my experience. I want to share the lessons that I’ve learned, hoping to spare each reader from some of the heartache that I had to endure. I also mention that my comments are suggestions and not demands. I believe the lesson content represents a good solution for the problem being discussed, but I also allow for a difference of opinion. Each trader comes to the table with an individuality that has a large influence on how decisions are made.
Still, there are some issues that I take personally. It’s not that I believe I am infallible. Far from it. I go out of my way to mention big mistakes in my trading history. It’s not that I believe the student is out to get me by going against the suggestion. However, in a small number of specific situations, I believe that my mindset represents THE TRUTH. I am hurt when someone goes the other way, even though I want every reader to make up his/her own mind, and my real job as an educator is only to guide your decision-making process. I want to influence how you trade and manage risk; I do no want to tell you what must be done.
One example comes to mind, because I see it far too often. I confess: I have this trait somewhat myself and strive to overcome it. Perhaps that’s why I am so unhappy to see it in others.
We trade to make money. I consider trading to be a business and encourage others to believe the same. That’s true for the part-time trader and the full-time trader. The two top priorities/objectives of this business to make money are to always take on only an acceptable level of risk, and to be certain that we never go out of business with some large, unexpected loss.
If we get these right (and the business plan is viable), the business should flourish. For this discussion, we’ll assume our business plan is viable.
This business can be summarized succinctly: Make a trade that provides a reward sufficient to merit the risk being taken. Then, manage the trade as needed:
1. Cut risk when necessary. When a trade is in trouble and loss of money has already occurred or is imminent, the only priority is to get risk down to an acceptable level. It is not to find some way to stay in the trade. It is not to worry about making enough money tomorrow to overcome losses to date. It is to get out of trouble. It is to stop the losses. It is not to salvage the profitability of this trade. It is not to prevent a loss. It is not to keep your ego satisfied. It is to get out of a high-risk trade. You do that by cutting risk or exiting the trade. That is the only priority.
2. When you have done the job well and once again own a position that is worth owning, manage that trade from today into the future. Ignore any break-even point. Ignore what has to happen for the whole trade (initial trade plus adjustment plus exit) to show a profit. Your goal is to earn money from the point of adjustment into the future.
3. Making and owning viable positions is how we win. Holding positions that are underwater or which have earned too little money to satisfy our needs and risk requirements is not viable. You are not married to a trade. You are married to the business.
4. If it can’t be managed, get out. If a trade is not working, if it becomes too risky to hold, if your opinion changes, if the trade becomes no longer suitable-- Get out. Unload the inventory.
5. Finally, begin anew with another trade when conditions are appropriate.
That’s it. That’s the business plan. We own and manage attractive inventory. We dump unattractive inventory.
So why is it that (judging from messages and questions) we still refuse to adopt that philosophy 100% of the time? The goal is to make money. And not to make a killing from one trade, but to prevent being killed by one trade. Our goal is to earn more money from winning trades than we lose from losing trades. It is not to have as many winning trades as possible. It is to make money, commensurate with acceptable risk. This means giving up on a trade when we have a better trade to own in its place. This means not seeking the last possible penny from every trade. It means trading with humility and the understanding that we are not invincible. Why is that so difficult? And why does it upset me when I am asked a question that shows that a reader is not obeying these rules/suggestions? I know why. It is because I, like many of you, have so much difficulty following them myself.
Mark D Wolfinger
Options for Rookies
Options involve risks and are not suitable for all investors. Prior to buying or selling options, an investor must receive a copy of Characteristics and Risks of Standardized Options, sent to you in previous communication. Additional copies may be obtained by calling TRADEKING at 877-495-KING or by visiting www.TradeKing.com/ODD.
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All investments involve risk, losses may exceed the principal invested, and the past performance of a security, industry, sector, market, or financial product does not guarantee future results or returns. TradeKing provides self-directed investors with discount brokerage services, and does not make recommendations or offer investment, financial, legal or tax advice. You alone are responsible for evaluating the merits and risks associated with the use of TradeKing's systems, services or products.