How to Make Money Trading Stock Options
by: Dr. Stephan Cooper
What is the SECRET to Stock Market Success???
Dr. Cooper says, if you’re going to trade stocks, then…
DON’T LOSE MONEY!”
Do you like that one? It is simple and to the point isn’t it? You may be saying to yourself “I already knew this much. I hadn’t planned on losing money.” But let me respond by informing you that nobody enters the market with the goal and intention of losing money. However it is just as true that:
“Every person who enters the market without a clear plan is destined to eventually fail.”
This reality is more quickly evident with options traders for the same reasons that make options trading attractive in the first place. That being, options provide an accelerated movement, up or down, of your investment capital.
“Keep the money that you’ve made.”
The application of this principle is found in the ability to control fear and greed, and to consistently follow sound money management rules; both of which we will later discuss in some detail.
WHAT MAKES THE STOCK OPTIONS BUSINESS SO EXCITING?
Your expectations in becoming an options trader are of course your own. You may not at this point have enough knowledge to know what to expect. Let me tell you what it is that excites me about this business.
1) The overall thrill of entering this vast arena called the stock market and being able to earn extraordinary profits from the decisions I make and the actions that I take.
2) No employees.
3) No inventory.
4) No selling to my friends, family or others.
5) No billing.
6) No shipping or handling of products.
7) No advertising costs.
8) No office to maintain.
9) No insurance costs.
10) I can work from anywhere that there is a phone and a computer.
11) I can take time off anytime I want without any detrimental effect to my business.
12) I am autonomous. I do not need to check in, ask permission, consult with or answer to any other person.
13) Very little time is required. I spend no more than 1/2 hour per day in trading.
14) Very little money is required to start this business. Think how much money it takes to start up any franchise or just about any other business that comes to mind. It costs more to start selling snow cones than it does to begin trading at home.
I can think of no other business like this! Can you? Reading this list gets me excited all over again.
WHAT IS THE STOCK MARKET?
Reduced to it’s essence it is a place where buyers and sellers meet to make exchanges. For there to be any transactions in this market there must be willing buyers and sellers.
These willing buyers and sellers come to an agreement of price but a disagreement of value. If buyer A is willing to pay $2 for an October 20 call option on Fink, Inc. and seller B is willing to sell an October
price but a disagreement on the value of the option being bid. Seller B doesn’t think that the option is worth $2 so he is happy to sell it to buyer A. Buyer A thinks this option is worth at least $2 or he would not be willing to buy it for that amount.
This dance between buyers and sellers is what makes the market go round. It is today, carried out electronically from around the world by anyone who likes the music and has the ability to get to the party.
The number of people who are willing and anxious to trade options is exploding. This is great news for us!
Why is this so great you ask? Because most of these people are novices without strong trading plans and the will to follow them. Think about that for a moment or two. Secondly, having more active traders creates a larger market with more opportunities and liquidity. Are you understanding a little better how important our ground school (study of this manual, paper trading, etc) is to your future as a successful options trader?
By application of the principles and rules contained in this manual, and with practice, you will learn to sit back and watch this tug-o-war between the Bulls and the Bears. You will not follow the herd headlong, being pulled by the song of the twin Sirens; fear and greed. With near detachment you will make your trading decisions on the basis of rules which will illuminate the movement of the masses without your being trampled by them.
THE PSYCHOLOGY OF TRADING
We now come to a topic that is vitally important…
There are a number of reasons why novice traders are disappointed by the results of their trading decisions. Choosing good underlying stocks; correct options strike prices or expiration dates; with correct timing in executing the buy order or sell order; are each integral parts to the profitable trade. Getting any one of these components wrong can have an unpleasant consequence to your account balance.
It is easy to see that clear decision making in each of these areas is mandatory to making money as a trader. There is an overriding factor, which can affect each one of the aspects of the successful
this critically important consideration. They cannot, however overlook it for long. Others who do consider it do not know how to disentangle themselves from it’s myriad subtle allures, until it is too late. I say, too late, because the longer it is ignored the harder it is to see, even when you are nose to nose with it’s very presence.
May I then present to you the great “wild card” as applied to the stock market…
THE PSYCHOLOGY OF TRADING
Your first meeting with this misunderstood friend (to be) must teach you this one foundational lesson. It is that…
“Without understanding the psychology of trading, your chances of profitable trading are profoundly limited.”
I hope that introduction is sufficiently ominous to spark your interest and command your undivided attention. If it has not, stop right here and start this section over.
When I began studying the subject of stock market trading, a recurring theme became apparent. It is that:
“90% of success is determined by mental and emotional control.”
One may look on and errantly presume that successful traders are extraordinarily brilliant, lucky, or otherwise possessed of some rare gift which assures them of success. If you hold, even in part, to such that market traders had to be smarter than the rest of us in order to win. I looked to those few big boys I saw as being just that; smarter than me. This was my perception, and millstone. I later learned that extraordinary intelligence and analytical ability are generally a hindrance rather than a boon.
Some years ago I attended a convention in which a number of famous commodity traders were featured. The audience was made up of both professional and novice traders. I am by long practice an observer. I learn first by watching and listening. Then in the privacy of later consideration I sift through the new information and apply it to the matrix of my own experience and knowledge. So, at this convention I was “all eyes and ears.” What did I see and hear that applies to this discussion? It was primarily this:
“Most of the traders I saw talked smart, thought smart, but acted stupid.”
They indeed had much to say on breaks and at lunch. They were technically proficient with respect to the terminology and intricacies of the markets but when it came to the bottom line, “what are you up this year?”, the smart sounding diatribe gave way to cold reality. Most were not doing well at all. Later as I played back in my mind inflections and conviction, it occurred to me that as brilliant as many of these people were, the were not in control of their EMOTIONS!
Here is the lesson of my experience with the big boys:
“When left unchecked, emotion will always relegate reason to a subservient position.”
It really comes down to two key emotions.
FEAR and GREED
Fear is most often manifest in:
1) Fear of missing the boat.
This common trap can also be called the CNBC syndrome. In this scenario the trader sees the market, or sector or stock making a big move. On CNBC any one of a stable of experts can be trotted out to explain why thus and such has occurred or will occur. For further persuasion the ticker in the lower right corner of the screen shows the DOW moving up quickly. Being afraid of missing out, the person makes a decision to enter a position. This aspect of fear is also seen in the person who listens to tips from friends, other traders, or Uncle Bob.
2) Fear of losing a profit.
A. In this case the trader makes the decision to exit a trade as soon as he sees he is losing money. After all, if the trade is losing money it must mean that he made a bad decision and will surely lose more money. Better to get out now before it gets worse.
B. Fear of taking a loss can also show up this way…The person holds a losing position far too long in the hope that “it will come up tomorrow.” It won’t be said out loud but is clearly understood in the privacy of this traders mind that, “I will just hold till it goes up. If I sell for a loss I admit defeat. I admit that my initial decision to buy this position was flawed.”
3) The fear of losing profit
This causes a person to hold a winning position too long. They may actually watch an outstanding profit erode well after the position has peaked. “I had a double a week ago so I’ll just wait until it comes back up again before I sell.” What was a double (100% increase) last week not uncommonly becomes a loss this week because of fear of losing a profit. Conversely, the fear of losing out on a profit might persuade a trader to close a winning position too soon. One of the key attributes of a winning trader is to be right and sit tight. Greed can also distort one’s thinking so as to bring about the same results as fear.
Greed is commonly manifested in these ways.
1) “I want just another $500.00 out of this trade then I’ll get out.” Greed tells us that we can get just a little more. If that new profit level is reached, greed tells us that we can get just a little more still.
2) The greedy trader is often overly tempted to put too much money into too few trades. He looks to make it big on one trade. This is a great way to cut a potentially great trading career short.
3) Greed can also result in the same bad ends as shown in the examples of the results of fear. Look back to the examples of
There is a second great principle of trading psychology which must be discussed and understood.
Fortunately each one of us has a distinct and unique personality. Your style of trading must conform to your personality. For example day trading (entering and exiting a trade on the same day) demands that the trader make many decisions in a short span of time. This accelerated pace of trading can be quite exciting but also very stressful.
If because of your personality you thrive on fast paced action and are good at making quick and frequent decisions, day trading may stimulate you. If on the other hand your personality is such that you are more comfortable making very considered decisions and you don’t enjoy your fortunes changing hour by hour, day trading will be an unbearable stress. If you fall in this second broad category then position trading is better suited for you.
“1f trading is forced it is not going to work for long.”
Trade in a way that is least stressful to you. If you try to strictly adopt another persons trading style you
You should ask yourself:
Do I want to be a short term, intermediate term or long term options trader? Do I enjoy volatility? Does the prospect of a 25% gain in one day outweigh the pain of a potential 25% loss in one day? What kind of return on investment am I seeking? How much capital am I willing to risk on a single trade?
Later in this manual I will snow you my personal trading rules. From those you will be able to see my personality. If you are comfortable with the way I trade, then by all means trade as I do. If on the other hand your personality requires you to be more or less aggressive in trading, then alter your own trading plan to better suit you. There are universal principles that apply to all options trading. No two people will trade exactly alike.
In the excellent book Market Wizards, Jack Schwager presents biographies of many of the top traders of our time. One of the fascinating insights that can be gained from this book is the realization that no two of the market wizards are alike, or even nearly alike in their trading approaches.
And remember, you will always paper trade your ideas before committing real money to the market. This gives you the opportunity to trade risk free and virtually emotion free. Learning to remove yourself from the Siren’s song of emotion driven trading decisions takes some practice.
Personally, if I am anxious or upset about anything in my life I refrain from making a decisions about opening positions. If I am in the market, I cling to the rules that I will later describe, like a sailor to a life raft.
This is only a FRACTION of the information you will receive from Dr. Cooper’s Stock Option’s training. Please visit the training center for more information about Dr. Cooper’s course and materials.
Choose Another Keyword
Below to Learn Even More