Zig Ziglar used to say, using the analogy of archery, “You can’t hit a target which you can’t SEE!”

It applies to trading more so than anything I’ve ever seen.  The reason is that trading is such a long, sequential series of decision-making events.

Each and every choice that we, as traders, make has a specific consequence.

Fortunately, as we trade stock, options, futures, forex and commodities, every one of those decisions and resultant consequences can be empirically measured and recorded

Beginning with a trader’s stated goals, continuing through her trading plans and procedures and ending with her final outcomes and evaluations of performance, every step can be measured and placed on an accounting sheet in hard, cold numbers.

The challenge of traders, especially of beginning students, is that they tend to ‘not get around ‘ to such mundane, time-consuming and tedious tasks.

The result, however, is that many don’t really know where they’re at on the road to ‘success.’  Their path is vague, their results are even more vague and it is very difficult for one’s subconscious mind to accept a true ‘arrival’ point.  Things are far too cloudy to ever truly know exactly where they are.

Moral of the story: Set CLARITY as a personal, psychological trading goal in all your activities.

Options are only of four varieties.  CALLS that are bought and sold and PUTS which are bought and sold.  That’s it!

So what’s all the fuss about?

Here’s what it’s about:

#1 – They’re more complex than they look.  Each option has a basic purpose.
Calls bought give the owner the right to buy an asset at a certain price by a certain time.
Calls sold carry with them an obligation to sell an asset at a certain price by a certain time.
Puts bought give the owner the right to sell an asset at a certain price by a certain time.
Puts sold carry with them an obligation to buy an asset at a certain price by a certain time.
Easy, huh?

#2 – Six numerical values determine the MOMENTARY value of an option:
a. The Strike Price (buy/sell price)
b. The current price of the stock which it represents
c. The number of days left until it expires
d. The current volatility number on it
e. The current interest rate
f. The current dividend rate

#3 – Five market conditions are continually, every second affecting the price value calculated above, some making it rise, others making it drop in value:
a. Price rise in the stock
b. Price drop in the stock
c. Passage of time
d. Rise in the volatility
e. Fall in the volatility

#4 – Option premiums, in general, consist of two parts: Intrinsic value (value they have according to where their strike price is in relationship to the stock price) and time value.

#5 – Each option has five characteristics which measure how much effect the ever changing market conditions will have on them:
a. Delta
b. Gamma
c. Theta
d. Vega
e. Rho

All of the above describe each of the four SINGLE options mentioned at the beginning.

But, guess what??!!

Single options are not often used.

The COMBINATIONS of those options, in what are called vertical spreads and calendars, increase their complexity exponentially!

Wait, there’s more.  The verticals and calendars are referred to as the ‘foundations of advanced options trading.’

The combinations of THEM and single options and stock make for a challenge to any trader!

Many, many people, especially those looking to leverage their money, are attracted to options trading.  But is it really that ‘easy,’ as the title suggests?

I ask you to consider just a few simple items:

#1 – Options are not directly connected to the stock that they represent.   What I mean is that their price movements are not linear or equal.  For example, you might believe that a certain stock, valued at $30 per share, is going to go up in value.  You can buy 100 shares for a $3,000 investment and hope that they price does go up as you believe OR you can buy one option, thus controlling that stock for, say, 2.00/share or a $200 investment.

What can easily happen is that, over time, the stock DOES, in fact, go up to $32 in value.  You then go to ‘cash in’ your option and, guess what, you’ve LOST money!

The reason for this is that there are other market conditions that affect the value of that option, NOT just the price movement.

Learning how to read those market conditions and, especially, learning how they affect the value of your option can take quite a bit of time, money and energy.

#2 – Unlike stock, options can LOSE THEIR VALUE simply by the passage of time!  That’s right.  Place $1,000 into that old sock and bury it in the back yard and, when you dig it up 5 years later, it’s STILL $1,000.  But place a $1000 investment in an option and IT COULD EASILY DECAY IN VALUE, all the way down TO ZERO over time!

#3 – Options trading requires a lot more training and ‘trial and error’ than does stock trading.  This ‘trial and error’ is soft talk, meaning that you’ll likely LOSE MONEY while you learn.  Therefore, one should only trade options with money that one can afford to lose.

So, is there REALLY an easy way to learn how to trade options profitably?

No more than you can take a 2 week course and learn how to be a surgeon!

I don’t mean to pour cold water on anyone desiring to trade options.

Quite the contrary, my purpose is to inform you that while they say, ‘the stock market is risky’ and that ‘options trading is risky,’ what I’ll say is that the only thing that’s TRULY risky is trading options without the proper amount of training, mentoring and practice, practice, practice.

So, yes, pursue options trading.  I greatly enjoy it and am slowly becoming more and more profitable.

Just know that, as in anything worthwhile in life, there’s a price to pay.

The psychology of trading.

What does that MEAN?  Isn’t trading just reading a bunch of numbers off of a chart or looking at graphs of stock and making a bet as to which way the stock is going to go?

Well, yes, reading graphs and charts and pushing numbers on a computer are what trading is all about.

Well, that’s not quite what it’s ALL about.

Here’s the skinny on trading and learning how to trade without losing your shirt: 
It’s a game that requires deep skill and knowledge.  The techniques must be mastered, the vast array of the market must be wrestled with and many risks, with your hard-earned money, have to be taken.  But all of those things, it turns out, are the EASY part!  The tough part about trading is the psychological aspect.

A couple of examples are in order.

First, one must look at the thousands and thousands of ways that they are to trade and select a very few methods which fit their personality.

What’s so tough about that, you say?  Most people don’t KNOW themselves well enough to do that effectively!

Second, one will have to write out a set of trading rules and procedures and then stick to them even ‘under pressure’ (losing money).  That will call for a large amount of self-discipline.

Speaking of self-discipline, to master the art of trading one must use tried and proven portfolio management rules.  Otherwise one will soon find himself BROKE, having lost ALL of their trading capital.

Thirdly, one must be highly self-confident.  A lack of belief in one’s deservedness to succeed or in one’s ability to overcome obstacles will help to separate you from your money.

OK, OK enough dreariness.  What’s the GOOD NEWS??

It’s this: The technical material in trading, the techniques used for making profits and the many facts about the market are all learnable.  The psychological portion, described above, is all about YOU!!

YOU, dear friend, have no control over what the market will or won’t do, but you DO have total control over yourself and your emotions.

Get those ‘together’ and you will do well in this field.

Come join us those of us who are ‘on the road to victory!’

All students of trading are told, early on, that the psychological aspect is a major issue, that mental images and perceptions play a large role in the success or failure of our trading activities. 

The same is true of market crashes.

This is why observers refer to crashes, aside from statistical and financial events, as SOCIAL PHENOMENA as well.

An example of what they are referring to is what many people call the human phenomenon of the ’self-fulfilling prophecy.’

Here’s one example of how it can work:

A mass media or journalism leader makes a striking claim, over a large network device such as the internet and/or television.  Then many like-minded people, sharing the same philosophical, political or world view, repeat the statement and overhear it from others.  This ‘echo chamber’ effect amplifies the transmission of the idea. It is repeated again and again, verbally and electronically.

Often the repetition or ‘passing on’ is done with imposed exaggeration or other distortion that matches the repeater’s personal viewpoint.  He welcomes the idea because it’s a confirmation of what he believed from the start.

Finally, a large populous assumes that the original statement is true because ‘everyone’ says so.

This is what Robert Merton, 20^th century sociologist, in his book, Social Theory and Social Structure, referred to when he said that a self-fulfilling prophecy is, in the beginning, a FALSE perspective of a certain situation.  BUT, people believe him and change their behaviors to match it!  (He calls this portion of the phenomenon the ‘reign of error.’)  Eventually this new behavior makes the original concept come true.  Finally, the person who stated the original perspective, citing these people’s behaviors, claims it as proof that his statement, was, indeed, correct.

This is at least partially what has happened in our recent market crash.

A media person, with his own power or political agenda, makes a frightening assertion.  Like-minded folks accept it as confirmation of their owner personal fears and repeat it any number of times, behaving according to it and get it echoed from others of similar mentally, until it ‘catches ‘on’ and becomes ‘obvious’ true.

The moral of the story is this: Do you OWN thinking and listen, as little as possible, to media moguls.

Is it time, yet, to send the stock market a ‘get well’ card?  A note saying, ‘Hoping for a speedy recovery?’

Is it over?
Have we hit bottom?
Are we at least in a sideways market, now? 

A few months ago, there were quite a few pundits attempting to call the bottom, but their number, I’ve noticed, has been steadily diminishing.  The reason is obvious.

We’re in a free fall.  We’re lost.  We don’t have a clue where we’re at.

Back when the VIX was in the teens, at least we knew what was going on.  Things were slow and steady, option values were low and things were relatively quiet.

Everyone just KNEW that a VIX in the 90’s was absolutely impossible.

When the Black Swan did come, the VIX readings said it all –- panic selling tumbling over fear selling which was falling on top of uncertainty selling.

After all, a bear market is different from a crash.  Bear markets are readable as such.  Technical analysts speak of ‘lower highs and lower lows.’  Probability traders call attention to the statistics of increased put buying over all buying, etc.

But a crash is an abrupt and dramatic decline in prices, usually over a relatively short time frame and across a large portion of the overall stock market.   Additionally, a crash differs from a bear market in that it’s driven as much by investor fear and uncertainty as it is by hard cold financial statistics.  Some have even referred to it as a social phenomenon.

Yes, the market IS ill.  It’s running a temperature and is weak and infected.  Unlike the ‘Black Monday’ crash of 1987 after which the market rallied back right afterwards, recovering completely in just two years, this one may be a bit different.

Send it a ‘get well’ card.

For the more experienced traders of options, I offer the following:

The PUROSES of monitoring a trade are three fold:

a. If the trade is working AGAINST you, see how you can reduce your risk
b. If the trade is working FOR you, see how soon you can take profits, exit and take the risk off the table
c. If the trade is working AGAINST you, see how you can shift your risk to a different place and/or shift your profit bubble to where it must be to make money.

Fortunately, most successful traders have a standard ‘bag of tricks’ that they apply FIRST and FOREMOST to any trade.  These simple, but effective, tools might include:
• Give it more time for the laws of probability to take effect
• Roll out to the trade further away from the action or to a further expiration day
• Reduce your lot size (number of contracts)
• Close out the trade when a reasonable amount of profit has been achieved
• Close out the trade with a small loss and go find a better one
• See if a simple addendum trade can be added that will be more appropriate to the new conditions, IF that trade is of a defined risk and has enough time for the laws of probability to act
• Buy any short option back whose value has dropped to .05

Monitoring, then, can be the most crucial part of any trade.  BUT, you must be ready with specific action points of when something must be done, with specific actions to be taken when needed AND these must be set in your trading plan BEFORE you place the trade.

More later….

One of the most common and deadly errors of students of options trading is the entering of a trade without fully comprehending the TRUE RISK in that trade.

While the trading of options is attractive to many students of trading because of the leverage advantages that it offers, they sometimes fail to recognize that that leverage WORKS BOTH WAYS.  On the one hand, they can control a large number of shares in an underlying, but, on the other hand, they can easily lose ALL of their money unless they fully comprehend the complex dynamics of what happens to an option when exposed to market conditions.

A major key to understanding those dynamics is the understanding of the greeks.  The three market conditions of price movement, passage of time and implied volatility movement have a tremendous effect upon the values of all options.  The greeks provide the trader with the opportunity to readily analyze how susceptible their option is to each one those parameters and whether action in any one of them will help or hurt their trade.

The greeks, then offer, a way to measure the CURRENT RISK in any trade and must be coupled with the dynamics of expiration day to gather the total TRUE RISKS involved.