Successful Option Trading in the Long Term

Option Trading Topic: And we have an option trading winner!

Dear Options Trading FAQ:

Everywhere I read that option trading is a deadly game and a losing one. I have been trading options since Jan 95 and have been successful since April 95. I am currently up 205% for the year in my options portfolio. What am I missing? Is this all going to come tumbling down on top of me?

I do thorough options research and only buy options on top quality companies. I have been successful with my options 85% of the time and am making a killing. I keep looking for the monster that is going to jump me and take everything away. Am I blind and this is all going to disappear in one fell swoop? I buy in or at-the-money options usually six months out after doing extensive study.

Doing Great with Options Trading

Dear Doing Great in Options (for now):

It is nice to hear an options trading success story such as yours. I am very happy for you. It seems that you corrected whatever was wrong the first few months and really got on a roll. Here are a few observations as to what you may be doing right:

Buying at or in the money options - Many are tempted to maximize leverage by chasing only out of the money (sometimes WAY out!) options. This makes it a real crap shoot.

Buying six months time - It may cost a little more, but this is often a real life saver. Much more conservative than always playing the current month options.

Research and staying with Top Companies - Oftentimes options players play from the gut - hopping on a quick trend with out the due diligence that they would sink into a stock purchase. Also, with the quick introduction of options on OTC speculative type issues, the quality of the underlying stock is not top-rate. The more casual paced investor may not react in time to the quick swings in this type of stock.

To balance things out, here are a few warnings about options trading:

You have done well for six months. Realize before you quit your day job that you will need to extend this streak to decades if you want to retire from it. Can you keep up the pace? The experience is a heady one now, but can you keep up the energy when some losing option trades show up?

I have gone through hot spells where anything I trade spells $. These periods inevitably cool off as does my passion for options. At these points, one must fall back to other areas of interest such as stocks, bonds, baseball cards. Do you have a well-rounded trading repertoire?

If you hit a slump in your option trading (and, sorry to say, you will), can your constitution and bankroll take it? Can you limp along until you once again hit your stride?

I assume the trading has been from the call option side so far. We have been in a bull market that is unbelievable to many savvy traders. They have been too smart for their own good. It has been the novice that does not know to be afraid that has been raking in the cash.

When the market turns (perhaps dramatically) will you recognize the need to switch to the short side? Having trained yourself to expect good things from call options, do you now have an up-market bias? The truly versatile trader can recognize a trending market and play it regardless of direction. Will you graduate to this level of sophistication? Or will you suffer with the rest until you run into a similar market again? As they say: Do not confuse brains with a bull market!

Enough of the lecturing. Continue with your lucky streak and thanks for the story. It gives the rest of us hope. Enjoy your option wins while they last!

PS. I’m reminded of an old client who would take his wife on a super deluxe extended vacation at the height of every hot streak trading options. When I commented on it, he told me that he had learned over the years to enjoy the fruits while he had them. As he said about a trip to France: The markets can take my money away next time, but they will never take this trip away from me.

Good luck and trade well! Remember, an educated options trader is the best options trader. Browse these books books on trading options.

Tags: Options Trading, Options Strategy

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