This article was originally published in the Yahoo group “Option Club” on Dec 19, 2009 at https://groups.yahoo.com/neo/groups/OptionClub/conversations/messages/17583.
I'm re-writing it with more current information.
The absolute most important thing with trading is to keep your losses under control. (It’s the same with gamblers) Options have been around for decades and people have tried just about every combination possible with them. There’s likely nothing new that hasn’t been done before. People might come up with creative names, like Weirdor, Mango Butterfly, M3, Tarzan Loves Jane, Condagonals or some new “secret sauce” but all they boil down to are combinations of basic strategies. It’s what you do after you put the trade on that matters (unless you’re in the camp that doesn’t do any adjustments)
Evan Rothschild had a presentation recently where he discussed market risk. It was very eye opening. Evan reminded us that the market was down 22.7% in one day in 1987. If SPX dropped 22.7% today, that would be a 461.52 point drop to 1571.59. How would your Iron Condors, M3, Broken Wing Butterflies be doing then?
Read Michael Catolico’s paper on Option Adjustments. It’s great stuff. This is one of the best guides to adjustments I have ever read! He is reacting to the market and keeping his risk under control at all times. (I'm trying to find Michael Catolico so if you know how to contact him, please let me know).
Every time you adjust, it costs you money. Over adjusting is a common reason traders lose money. As my friend Joe Ross says, “you have to take some heat.” You need a trading plan and stick to it. Knowing how much heat to take before you react is part of the art of trading. This is developed over time with a combination of back testing and live trading.
Mark Sebastian, one of Dan Sheridan’s former mentors, started Option Pit (optionpit.com) where he had an interesting article about how market makers use Units to keep from going out of business. In that article, Mark has a great point:
In every trade there are three scenarios:
- Being right
- Being wrong
- REALLY being wrong
Notice how this keeps you in business if the market has one of those seven standard deviation moves. It's all about controlling risk.
UPDATES: Mark did a presentation on Units with the option club.
In a recent webinar with Capital Discussions, Mark Sebastian said he no longer uses Units but looks at the VIX term structure to decide if he needs to hedge. He hedges when VIX futures are in backwardation.
Long Term Support
After risk control, the big thing you need, imo, is some kind of community for long term support. I recommend that you join the Capital Discussions free community. We have very active free forums and trading groups. For many, it is all you need. The discussions are interesting and thoughtful.
This is the part of the article I talked about the pros and cons of Sheridan Options Mentoring mentoring program. It's still a good mentoring program but in today's environment, perhaps on the expensive side. We are rolling out our own mentoring program that is more cost effective. Many of the points I made about Dan's mentoring program are still valid and carry over to the Capital Discussions mentoring program:
- A large community of traders. Capital Discussions has about 120 members logging in each day during the week and growing.
- Trading Groups.We have seven trading groups that meet weekly and exchange ideas, including one in Spanish and one in French and a private trading group for John Locke's APM course members. Trading groups focus on different types of trades and are a great way to share research, get advice from other members on trading ideas or trades that are in trouble. It's generally unstructured and allows for great peer-to-peer interaction.
- Live and recorded access to all webinars. We have a growing library of recordings including the trading groups, guest speakers and our experts. The expert recordings are generally restricted to their subscribers but everything else is free and available to all members.
- Our mentors are all trading full time. All of our mentors are trading their own capital and/or capital for other individuals. We don't have any retired traders or traders who only use paper trades teaching.
- The website. Like I said in my original post – “Hey…I built and maintain it so I think it's a PRO). As I was in 2009, I'm constantly improving the website. I am a developer and option trader and run one of the trading groups so I can see what's needed to make the site better. We are small and flexible so suggestions are implemented normally pretty quickly.
- No secrets. There is no easy way to learning to trade. It's like learning any profession. You need to put the work in yourself to learn it. I've found the more I put into something, the more rewarding it is later. There are no secrets. Just learning by actually trading.
- Includes OptionVue software. (A $594 value) We feel you need to have great option analytic software to make sound trading decisions. OptionVue has the most solid option modeling of all programs we have seen. We have arranged a free trial of OptionVue software during the mentoring program.
- One Expert trading alert service. (A $550 value) We let you pick one expert's trading alert service to follow while you are mentoring. This let's you follow and learn how a professional trader trades their own capital. It's invaluable training.
- Covered Call Class. (A $347 value) We taught a paid class on Covered Calls earlier this year. Mentoring students gets this class included with their mentoring.
- Price. Our one-on-one mentoring price is $2997 which isn't cheap but it's not as expensive as many other mentoring programs. I spent $3000 on a two day OptionEtics seminar and had no on-going support. Put a $2997 mentoring program with support in context with a $3000 seminar with no support.
- You have to work! No one likes to say this, but you have to put some effort into learning how to trade. This no different from the Capital Discussions mentoring or any other mentoring program. Don't let anyone tell you its easy.
- Scheduling. Our mentors all trade full time and during U.S. market hours. They might have to schedule around the times they are trading. If you work a full time job during U.S. business hours, this can occasionally cause problems. The mentors are sometimes flexible with their mentoring days and times.
- Printed materials. We don't have any manuals as we focus on online training.
I was a professional military pilot with the U.S. Air Force. We didn’t teach people to fly jets by giving them a book and saying go for it. It was a LOT of hands on training in the jet. That’s what any good educational program will help you with. Having an experienced trader look over your shoulder and show you what you did right and wrong with your LIVE trades.
Paper trades don’t count. You HAVE to do live trades.
You don't have to do a mentoring program but you do have to put on live trades. Back testing is great but it's not like live trading. Don't wait to start live trading until you back test the perfect system. Start small until you can be profitable and then start increasing your size. Keep your risk defined and under control.
Join a community where you can exchange ideas. Trading can be lonely so it helps to have other like-minded people to talk to.
There are many great educational resources online but there's nothing like having an experieced trader give you personal instruction. Trading is like other professions in that the fastest path to success is to be taught by someone currently practicing in the profession. Finding a suitable mentoring program can fast track you to being a successful trader, but only if you are willing to do the work!