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I don't have great answers for you on risk management even though I've been investing in stocks since 97, I still consider myself to be not that much better than an amateur. I've made a lot of mistakes over time. I don't have much time to write about this right now, but I had a debate/discussion w/some other people on a non-investing forum about "buy and hold" being a terrible idea. I basically asserted that one can find better times to enter and exit the market. It's near impossible to find the top or bottom, but still. To quote from my post there: and from a later post (made on June 1, 2012): Since it was hard to illustrate, I ended up making these YouTube videos (on June 1st, 2012). And I said: I really wish I knew about the 200 D SMA as being a decent indicator about the broader market YEARS ago and I wish I knew about TOS when I started investing. It would've saved me a LOT of pain. I recently did look at the 200 D SMA a bit more vs. a few shorter duration moving averages (e.g. 30 or 50 day). Perhaps a decent rule could be something like this? Enter the S&P 500 (e.g. via SPY) when it crosses above 200 D SMA but take some off the table after a long run up if it starts crossing below the 30 or 50 day and exit completely when it crosses below and stick to the rules. This shorter MAs really hadn't occurred to me until more recently. If I had only stuck to my guns about the 200 D SMA rule, I'd be better off. Take a look the attached chart. S&P 500 crossed above the 200 D SMA (red line) on 6/6/12. Back to funds, here are some examples (not recommendations) of funds that didn't do so horribly in 08 and in down years. Be careful, some of them have changed managers. http://finance.yahoo...FSX Performance http://finance.yahoo...pm?s=BERWX&ql=1 http://finance.yahoo...pm?s=FBRVX&ql=1 http://finance.yahoo...CKX Performance Since Yahoo Finance doesn't include 2011 performance yet (for some reason), you might want use Morningstar instead (http://performance.m...A&culture=en-US, click on Expanded View). Yeah, I've made big mistakes on names like C where when I bought them, I thought "this is one of the biggest banks in the world. They've got to be doing something right." Boy, instead I'm sitting on a huge % loss as I didn't sell.

Excellent collection of ideas from Dynamic Hedge By Dynamic Hedge. Since I started this blog I’ve had a number of aspiring traders send me messages about getting started in the trading world. This post is inspired by a series of letters between these gentlemen and me. This post in no way implies that I have all the answers. I consider myself new to this game every single day. I’m always fascinated by the reactions I get when I write people back (I answer every email). Most don’t like the answers I give. Trust me when I tell you that every lesson I share has been paid for in blood by way of excruciating capital losses. On seed capital: “…I just got $25k from my Aunt and I’ve always wanted to be a trader. Do you think this is enough for me to go at it full time?” Capital is the lifeblood of this business. The short answer is emphatically: NO, $25k is not enough to make it as a full-time trader. I know a few people who have done it, but I know a magnitude more who have failed. Small accounts are usually hungry for leverage or concentrated bets. Concentrated bets and/or leverage exponentially increase the number of variables that can take your account to zero in a day. Take this seriously. I didn’t say you could lose a little. I said ZERO. As a side note, never put all your money into your trading account. Maybe that sounds obvious, but there are plenty of people who get to their perceived capital start line (25K, 100k, whatever) and just go all in. Never do this. On proprietary trading: “It doesn’t seem like many proprietary trading firms are hiring these days and large financial firms are basically on lock down since 2008. I received an offer from a firm called [insert firm name] but turned it down. I got a bad gut feeling about it and they wanted me to pay them initially, then get firm capital.” Prop shops are dying. Only one in a hundred are worth your time and they’re not hiring because the business model is dead. It’s the end of an era. The truth is that prop trading hasn’t been that great since the the days of decimalization. Keep in mind that not every place that requires you to put up capital is a scam but they do deserve extra scrutiny and due diligence. The previous notes on seed capital apply. On Losses: “…I wish I was emailing you to let you know that I was still crushing the market. Things started out so great but unfortunately I’ve suffered some pretty huge losses and I don’t know if…” The only thing that matters is that you live to fight another day. I’m not being flippant about money lost because the money is important. It represents time and opportunity. Take some comfort in the fact that almost every successful trader I know blew up a small account at some point in their career. It’s so common it should be considered more of a twisted hazing ritual than failure. Yes, it sucks. But don’t let that experience define you. Take some time to discover the real reason you lost the money. Be brutally honest with yourself. Once you figure it out — learn the lesson and never repeat it. You paid for it. How you emerge from this is what defines you. On education: “I go to school at [insert university] and I’m really interested in becoming a trader when I get out. I’m mostly taking business courses…” Stop right there. If you’re still at school and you want to be a trader it means you should be taking as much math and computer oriented stuff as you can. Either that or you better introduce a star programmer to your future spouse and become best friends and business partners. You need programmers as allies or you need to be a programmer yourself. Trading is a quant game now. You can bitch and moan about it or you can do something about it. On mentors: “I’ve been following [insert mentor name] trading for months and for a while things were great. It turns out that [insert betrayal]…” In the finance world you will experience many false mentors. I have wholeheartedly placed my trust in people who turned out to be complete frauds. Besides outright fraud, there are also a lot of people who have made their career from sucking ideas out of bright young people. There are a lot of brokers who have made their careers sucking the capital inflows out of hardworking young people with no plan to help them grow. Don’t worry too much about this, just know that it happens a lot and it will probably happen to you. It’s a great feeling when you finally find a true ally and mentor and it’s usually accompanied by huge breakthroughs in your career. The real breakthrough occurs when you learn that there’s no one else in the world that you can rely on but yourself and you trust yourself to deliver. On “systems” “I read your blog and I really like you ideas on [insert any topic I've written about]. It’s very similar to something I’ve been working on. Before we go any further I want to know if you are comfortable signing the attached non-disclosure agreement…” I have a mental exercise that I go through when I feel like I’ve “cracked the code.” I visualize three other people in the world having the exact same idea as me at the exact same second as I did. There is nothing new under the sun. Ideas are cheap. The only thing that matters is execution and process. How you react to draw downs and the realities of having money on the line are much more important than any “system.” I don’t want to discourage innovation, just know that the ideas aren’t what make you the money, it’s the execution. On chasing the rainbow “…I’ve been having some success with [insert indicator] but I think I really need to incorporate [insert needlessly complicated financial theory]. I heard that all the guys at [insert TBTF bank prop desk] use it. Do you have any code for this…” The big “secret” of financial markets is that nobody knows what they’re doing. They only want you to think they do. No one can pull back the kimono and show you how the world works. There is no “god particle” of trading. It’s all testing, applying, and iterating processes. Think about this point for a good long minute. It means that while you are essentially hopeless and no one has the answers in this world you also have more power and possibility in your life than you previously thought. Don’t endlessly toy around with indicator settings. This is a colossal waste of time and energy. There is no more salvation in a 6-period moving average any more than there is a 7-period. The trade that one kept you in the other got you out of. Stop. On “making it” “…I don’t feel like I’m a greedy person. I’m just looking for a way to consistently make $400-$500 per day to cover expenses and build my account slowly. When do you think I will get to that level?” Never. When trading is good, there nothing better in the world. When it’s bad, it’s the worst. The concept of “lunch bucket” trading is not realistic. Trading is all about nirvana followed by crushing agony. I wish I was joking. You avoid more disastrous situations and you feel it less as time goes on but it’s always there. Most money is made during a couple of good months of the year and the rest of the time is spent avoiding murder holes. As a universal rule, the process will take roughly three times longer than you budget for. For most people it takes a good 5 years to even be considered competent at managing money. Getting objectively good at it? Lifelong journey. Conclusion There’s nothing in this world that anyone can do or say to a stop a man in his 20s with a bankroll and a desire to trade. Hopefully there are some lessons in here that make your journey smoother than mine. Team up with people you trust and have complimentary skills. Find an edge you have confidence in. Reach out to people online. Micheal Bigger is setting a great example of this. Never take your foot off the gas of forward momentum. Do whatever it takes. Everyone has done a few things that they were a little bit embarrassed about at the time, but they look back on with pride.

By Mark Wolfinger, Options For Rookies It is so tempting to begin trading options. Too many novices hear/read stories about earning 10% per month and, believing that nonsense, want their share of the ‘free money.’ They take a couple of lessons or read a chapter or two and believe they know what they are doing. A typical mindset is: ‘How difficult can it be if people are making 10% per month?’ I received this very upsetting note yesterday. Dear Mark, How are you? I read in your book about volatility as one of the important factors of the price of an option I have a few question about, what you wrote 1) In your book you say that volatility is unknown and different traders can get different values… but I have account with 3 brokers and they show the same (or very similar price) for the volatility… Future volatility is unknown. However, the market makers must make some volatility estimate or else they would be unable to establish bid and ask quotes. Your brokers are showing the IMPLIED VOLATILITY (IV) OF THE OPTIONS. They do not make estimates for the future volatility. They use the implied volatility because that is the best current estimate for future volatility. And that estimate changes, depending on many factors, including order flow (supply and demand). IV is often the best value we can use – unless you want to make your own estimate – and I doubt you want to try that. By definition IV is the volatility estimate that makes the fair value of any option equal to whatever price it is trading at in the marketplace. I was writing about people who make their own volatility estimates. They are the ones who cannot agree on what the volatility estimate should be and they are the traders who have different opinions on the value of an option. Those are the traders who could believe an option to be over- or under-valued in the marketplace. Not the brokers. They do not have an opinion. You will probably never make an estimate, but others can and do. You and I usually trade based on the assumption that the current IV and the current option prices represent fair value. But we can decide to go longer short vega, based on the current ‘fair value’ if we believe it is too high or too low. You can trade volatility if you so desire. 2) Since a lot of volatility, means that I can sell “expensive” options, doesn’t it make sense to sell options on Leveraged ETFs, such as FAS or FAZ, that have a lot of volatility? NO. If the underlying asset is VOLATILE then the underlying asset will undergo big price changes. If you sell options on stocks that make BIG MOVES, there is a good chance that the options will move ITM and that you will lose money. To compensate for the risk of selling options on volatile stocks (or ETFs), the options are priced higher. In other words, you get a higher premium, but that premium is justified. Your question frightens me. The pricing of options is a very basic concept. It may not be easy for us to know whether an option’s price is fair, but we have to accept the fact that the option premium that we see is the premium we can trade. If we choose to sell that premium, we do so believing that we have an edge. Volatile stocks have options with a high premium. Non-volatile stocks have options that carry much smaller premium. Surely you know that is true. When the stocks are volatile, option buyers are willing to pay higher prices because there is a decent chance the stock will undergo a significant price change that favors the option buyer (assuming he correctly bought puts or calls). Low-volatile stocks trade with much smaller premium because they are not likely to move far. People do not pay much for options when there is a high probability that the stock price will not vary too much during the lifetime of the option.. You must understand this. There is no way you can survive if this concept is not understood. Selling high-priced options because they are high-priced is foolish. The options carry a higher premium for a reason. What we want to do – and it is quite difficult – is to sell options when the implied volatility is higher than the future volatility of the stock will be. In other words, option buyers are paying for future volatility of the underlying. If that underlying asset is less volatile than expected, then we collected more premium than our risk deserved. Thus, we stand to profit over the longer term. But we do not know the future and we do not KNOW which options are priced too high. The bottom line is: It is wrong to believe that you can earn more money by selling options on volatile stocks or a leveraged ETF. You cannot trade options if you do not understand this principle. and last question 3) Do you think that a “portfolio margin” account, with more leverage, is a good idea? I would use all the leverage to sell options with 95% or more chance to expire worthless (and with the 5% I either get assigned, or roll out). Is this plan too risky? Portfolio margin allows traders to take a lot more risk. Reg T margin is far more limiting. I prefer Reg T margin because it removes the temptation for a trader to get in over his head. Yes, a lot more risk. If you are positive that you can handle the risk; if you are certain that you will NEVER, EVER allow yourself to have too much exposure to a big loss; if you are already a consistently profitable trader; if you are disciplined and will not use all available margin (above, you suggest that you would use all available leverage), or anywhere near all of it; then maybe you can use portfolio margin. But not now. Not if you do not understand the most elementary concept mentioned above. Let’s examine your question. You want to sell 5-delta options and expect to win 95% of the time. You plan to roll out or accept assignment on the 5% of the trades that end up with your short option being in the money. If that is true, then the plan is to hold all shorts until they expire worthless. All by itself that adds to risk. Some of those short options will be worth covering before they expire – just to minimize risk. You also must understand that you will not win 95% of the time unless your plan is to hold through expiration and not apply any risk management. But if you plan to roll out some trades that are not working, that already tells you that the 95% success expectation is just too high. Many times you will get too frightened to hold the trade and be forced to cover because even rolling out will leave you with a dangerous position. Consider this: You will not like the size of any loss. When you sell an option at a low price, it becomes very difficult for the undisciplined trader to pay 10 times as much to cover the short. Rolling out will not help. If your plan is to roll to a new 5-delta option, that will be a costly roll. If you plan to roll out for even money, then the short option will have a delta much higher than 5, and you will be taking more risk than your plan calls for. Please consider all aspects of your plan before taking action. So will you do it? Will you have the discipline to cover your shorts and lock in a good-sized loss? If the answer is not ‘ABSOLUTELY, YES’ then you cannot afford to use portfolio margin. Nor can you expect to make money by selling 5-delta options. That strategy is viable only for the disciplined (and experienced) trader. In my opinion, selling those low-delta options is not a good plan. There will be a day when those 5-delta options KILL you. It will not occur too often, and it will not necessarily come soon, but that day will arrive. There will be a big gap opening with a huge IV increase. There will be a day when those options you sold for 40 cents or one dollar will be trading at $20. At that point, the option’s delta easily could be between 35 and 60. Your account will be in deficit and you will be forced to buy back all of those options and your account will be worthless and you will owe your broker hundreds of thousands of dollars. If that sounds bad, the reality is even worse. The bid ask spreads would get very wide and your broker will buy those options by entering market orders. They will not ask your permission. You would be blocked from trading and your positions would be closed. Thus, you would not only pay that exorbitant implied volatility, but you would pay the ask price on a wide market. See for yourself. Lower the underlying price by 20%, double IV and see how much those options are worth And doubling IV may not be enough. IV is so are low right now that tripling of IV is a reasonable possibility. DO NOT DO THIS. No portfolio margin, and more importantly, if you do sell 5-delta options, you MUST watch position size. That is most important. I know that you do not want to believe that these warnings apply to you. But they do. thank you very much for your help I wish you well. But you scare me. Mark Wolfinger https://www.mdwoptio...mium/home-page/

By Mark Wolfinger, Options For Rookies One of the problems with trading is the perception that it is an easy business and that almost anyone can prosper. In fact, almost the exact opposite is true. Many can succeed but the commonly used estimate is that 95% of people who try to become successful investor/traders fail. I am sure that every Options for Rookies member already understands that trading is not ‘free money’ and that some effort is required to master the information and develop the required skills. For some, it does prove to be fairly easy and trading comes naturally. Others take their time and absorb the information at a rate that works for them. For the vast majority, it requires understanding what you are doing and paying attention to the details. I recently corresponded with someone who did not take the time to pay attention to all details. I know he understands the principle, but for some reason, one important step was overlooked in the order-entry process. This whole concept is worth further discussion. I can’t buy back my short SPX Sep 1295/1305 put spread. I have a $.20 bid in, and the mid-point is $.10. There are several ways to go about entering orders. One is to look at the bid/ask midpoint and try to get the trade filled at a price near that mid-point. This is a perfectly normal and acceptable way to think. However, we must pay attention to the details and use some common sense. And that means taking the extra moments to look at the bid/ask quotes to see if there is something valuable in them. Let’s take a closer look at the spread under discussion. With the short option being more than 100 points OTM, it seems like a good idea to cover by paying a very low price, and eliminate the risk of a market downturn. Especially when there is so little left to gain by holding the position. The efficient method for determining the real market for the spread, is to set up that spread on your broker’s trading platform and look at the bid/ask quote. I’m sure your broker has a way for you to see the price of a put or call spread, as well as for the entire iron condor. Scenario 1 The bid is $0.05 and the ask price is $0.30 This makes it reasonable to bid a low price with some realistic chance of being filled. In this scenario, a 20-cent bid makes sense. Scenario 2 The bid is zero and the ask is $0.50 We do not know the true market here. There is probably a bid above zero, but it is not being published. The true midpoint may be $0.30. There is not much chance of getting filled on a 20-cent bid, but I always enter that bid for two reasons: 1) If the market moves, someone may decide to sell it. 2) If there is some trading volume in these low-priced options, it is very possible that some individual investor will enter a bid (for the option I want to sell) or offer (for the option I want to buy) that temporarily sets up the spread with an offer that matches my bid. If that happens, my broker’s computer snaps up both sides and fills my order. This may not be likely but it is possible. Scenario 3 The bid is -$1.50 The ask is +$1.70 The midpoint is $0.10 It is a virtual impossibility to buy this spread at $0.20. When the bid is less than zero, the midpoint is meaningless. The true bid is probably 40 or 50 cents, even though it is not showing. But more importantly, if the offer is $1.70, no one is going to sell at twenty cents. This type of wide market occurs often enough that we must be aware. It is important to look at a market like this and recognize that the true midpoint is at least 85 cents (half of the ask price), and probably higher. Consider the other side. If you wanted to sell this spread, would you look at that 10 cent midpoint and offer it at 10 cents? Of course you wouldn’t. Well, when buying we have to look at the complete market. I understand how trivial this topic is. But the bigger picture requires that we know what we are doing. If we go to rote actions such as automatically entering the same order every week, or always choosing one strategy without knowing that this is really the most appropriate for you, or always looking at the midpoint and assuming that is the best market valuation, you are going to get into trouble. Traders must be alert. Money is always on the line. We cannot always make the decision that tuns out to be a winner, but we can always make a good decision – a decision that gives us a good chance to earn money. Paying attention to details is part of what is necessary to make good decisions. There was no harm done in entering that 10-cent bid. But, this trader was frustrated – and that is never good. There was no need for mental anguish. Mark Wolfinger https://www.mdwoptio...mium/home-page/