Options Trading

This is a discussion on Options Trading within the General Trading Chat forums, part of the Reception category; REALITY #1: More people lose money trading options than make money. Many people see the huge profits possible in options ...

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Old Oct 28, 2005, 2:43am   #1
Joined Sep 2005
Options Trading

REALITY #1: More people lose money trading options than make money.

Many people see the huge profits possible in options and think they're the path to riches. But the reality is much different for most. The SEC did a study a long time ago that showed over 85% of people who bought options lost money. The study was only for one quarter. But the result of that study is probably not too far from the truth...

While at our recent Investment U seminar, I asked trading coach Van Tharp, who has worked with thousands of traders (both amateur and professional), what he thought the real numbers were. I didn't mention the SEC study, but he came up with about the same number - 85% or more. Some may say it's higher than that, some may say it's lower. Whatever the real number is, it is safe to say that more people lose money trading options than make money


REALITY #2: "Writing options will make you money most of the time, but you will lose in the long run." - Victor Sperandeo

Many new options traders think the pros who sell options must make all the money. But options master Vic Sperandeo tells the real story in his book:


A lot of floor traders, especially the younger ones, love to write naked options. 'The fools,'
they say, speaking of the options buyer, 'they just keep giving me their money, and I keep selling 'em options that end up expiring worthless.' For 11 months out of the year, they can report a 90% success rate writing options, but in the last month, seemingly out of nowhere, the market moves 10% and they find themselves shelling out a lot more money than they had made, or even going completely broke." ... Vic Sperandeo

REALITY #3: An options trading system that reports a high percentage of winning trades could still be a losing system.

Vic Sperandeo's story above explains just that. You could collect $1 a month profit for 11 months, and then get hit with a $15 loss that wipes you out completely... yet you were right over 90% of the time. The way to prevent that from ever happening is to make sure you trade options with limited downside risk. And don't worry about the percentage of winning trades. Consider the bottom line as well.

REALITY #4: Want to be a winner? Watch your losers!

To succeed in trading options you really need to limit your trading to opportunities that have a minimum of a 3-to-1 payout. A 5-to-1 reward-to-risk ratio of course, is better. But at minimum, you want to have the potential to pocket three dollars in return for every dollar you risk.

You accomplish many things by forcing a minimum 3-to-1 discipline on yourself. For one, it forces you to think in terms of reward and risk, which is extremely important. Most failed options traders, even ones that may have had good trading systems, fail because they didn't pay enough attention to risk.

Consider this - let's assume that you're not willing to lose more than 50% on a position. You're not willing to let it expire worthless. If you're willing to lose up to 50% on a position, you'd better be expecting a gain of 150% or more - at minimum. That's a tall order. If you're willing to lose it all (meaning have the potential for a minus -100% return on a position), then you'd better be expecting a 300% to 500% or more gain in that position.

When you see it in those terms, and you realize that 500% winners don't come along every day, you can see "risking it all" is a bad bet, in terms of risk versus reward.

Options trading is a lot like poker. Your hand is only a small portion of the larger battle. Betting appropriately for the entire game is really what's important - which leads us to...

REALITY #5: Big winners in options trading make small bets.

You've got to know when to hold 'em, and know when to fold 'em. But you'd sure hate to fold 'em and take a total loss with a big bet on... so don't ever put yourself in that boat! Limit the size of your positions. You should only have 2-3% of your risk capital at risk on any one trade. Let me stress that this will not limit your ability to make big profits - this rule actually comes from Vic Sperandeo, who made 71% a year for a dozen years by doing this!

If you want to be successful over the long run like Vic Sperandeo was, and not just get a nice quick hit here and there, then you've got to understand these realities. Limit the size of your positions. And limit your downside by never allowing a small loss to turn into a big loss. Options traders who follow this have a chance of being winners in options over the long run. Those who don't do this will be quickly drummed out of the club, taken for every penny, literally.



I would like to here bulldozer veiw on the above

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Old Oct 28, 2005, 12:55pm   #2
Joined Dec 2004
You could replace "options" with "futures", "forex", "stocks", or basically any other market and pretty much be right on across the board.
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Old Oct 28, 2005, 1:11pm   #3
Joined Sep 2005
bad, good post!!!

.....wait for the flak to fly ....also, greater proportion of people crash and burn in options than do in futures......why ? well goes back to the short premium thing..you sell one future, thats your risk..sell a lump of teenies to make cash and they come back to haunt you more times than freddie kruger
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Old Sep 14, 2011, 10:52pm   #4
Joined Apr 2011
Re: Options Trading

So true Rhody. This is the same in any type of trading
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Old Sep 14, 2011, 10:53pm   #5
Joined Apr 2011
Re: Options Trading

REALITY #4: Want to be a winner? Watch your losers!

To succeed in trading options you really need to limit your trading to opportunities that have a minimum of a 3-to-1 payout. A 5-to-1 reward-to-risk ratio of course, is better. But at minimum, you want to have the potential to pocket three dollars in return for every dollar you risk.

You accomplish many things by forcing a minimum 3-to-1 discipline on yourself. For one, it forces you to think in terms of reward and risk, which is extremely important. Most failed options traders, even ones that may have had good trading systems, fail because they didn't pay enough attention to risk.

Consider this - let's assume that you're not willing to lose more than 50% on a position. You're not willing to let it expire worthless. If you're willing to lose up to 50% on a position, you'd better be expecting a gain of 150% or more - at minimum. That's a tall order. If you're willing to lose it all (meaning have the potential for a minus -100% return on a position), then you'd better be expecting a 300% to 500% or more gain in that position.

When you see it in those terms, and you realize that 500% winners don't come along every day, you can see "risking it all" is a bad bet, in terms of risk versus reward.

Options trading is a lot like poker. Your hand is only a small portion of the larger battle. Betting appropriately for the entire game is really what's important

This is the best one
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Old Sep 14, 2011, 10:54pm   #6
Joined Apr 2011
Re: Options Trading

A lot of floor traders, especially the younger ones, love to write naked options. 'The fools,'
they say, speaking of the options buyer, 'they just keep giving me their money, and I keep selling 'em options that end up expiring worthless.' For 11 months out of the year, they can report a 90% success rate writing options, but in the last month, seemingly out of nowhere, the market moves 10% and they find themselves shelling out a lot more money than they had made, or even going completely broke." ... Vic Sperandeo

The key to selling options is to always offset the trade with a long vega trade
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Old Sep 14, 2011, 10:54pm   #7
Joined Apr 2011
Re: Options Trading

Does anyone know who Vic Sperandeo is?
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Old Sep 15, 2011, 11:12am   #8
 
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Joined Apr 2008
Re: Options Trading

I do.
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