Archive for the ‘Trade As A Business’ Category

The Myth of Monthly Income Trading

Tuesday, September 12th, 2017

Seeking Monthly Income By Selling Option Premium

We have all heard the tales. Selling option premium monthly to generate a steady return one month after the next. At first, we wonder whether it is possible, but our questioning mind is soothed with the assurance that we will only use high probability, limited risk trades and that everything is going to be alright.  Besides, the math is with us. We have a Nobel prize winning mathematical formula that we can use to determine which options are statistically unlikely to be in-the-money when expiration rolls around. We can just sell those options and be reasonably certain that they will expire worthless... Right?

The concept behind monthly income trading is to use time decay as a surrogate for being right about short-term directional market moves. If we can sell options and let their value decay as expiration grows near, then we can consistently generate a healthy monthly return.  When asking retail traders about their planned monthly returns I have heard anything and everything from 1 or 2 percentage points each month to generating returns adequate enough to allow them to trade full time and live off of the profits they generate from their $5,000 or $10,000 trading account.

It is time to inject some reality into this discussion...

Probabilities are not easily calculated because those calculations largely depend upon an accurate forecast of the underlying security's price over a specified period of time; however, market volatility changes. As such, a probability calculation requires that we forecast a security's future volatility.  Sometimes our volatility forecast will be rather accurate and the probabilities that we calculate will be close enough that our choice of options will provide us with a high probability of succeeding; however, unexpected things happen in the market.  We will not always be able to foresee the unexpected and, therefore, we will not be able to factor those events into our volatility forecasts.

The truth is that success as a monthly income trader is not derived from the high probability nature of the options strategies used. Success depends upon a solid understanding of how probabilities, standard deviations, and other statistical measures used for such trading are derived. That understanding must also be coupled with sound risk management.  It is through the risk management that traders gain their edge in the market. Most retail traders fail to remain profitable because they place too much confidence in the "myth" of monthly income trading and fail to apply the needed risk management principles.

While no trader can guarantee themselves a monthly profit, monthly income trading can be a viable trading approach if you first invest the time to fully understand the nature of the options that you are trading and then apply sound risk management principles designed to maintain profitability even in the most unforgiving of market environments.  That is our mission as retail traders, and that is the mission we pursue in our member's Trading Room.

The Option Trader's Hedge Fund: A Business Framework for Trading Equity and Index Options

Wednesday, March 21st, 2012

The Option Trader's Hedge Fund: A Business Framework for Trading Equity and Index Options Mark Sebastian from OptionPit has published a book on options trading.  With the amount of energy he has put into establishing his own trading company, publishing articles for the likes of Expiring Monthly, and elbowing his way into the mainstream financial media, it was only a matter of time that we saw him explore yet another venue. The Option Trader's Hedge Fund: A Business Framework for Trading Equity and Index Optionsis the newest book on options trading to "almost" hit the shelves.  I say "almost" because it is actually in pre-order right now.  Last night I pre-ordered my copy in part to support Mark, but I am also genuinely interested in reading what he has to say.

So, what is this book all about? The truth is that I don't entirely know.  I am standing in line waiting for its release just as everyone else.  Nonetheless, we might gain some insight from the on-line description...

In this book, a hedge fund manager and an option trading coach show you how to earn steady, reliable income selling options by managing your option trades and running your option portfolio as a real business with consistent, steady returns. Packed with real-world examples, the authors show you how to manage your own “one man” hedge fund and make consistent profits from selling options by applying the basic framework and fundamental business model and principles of an “insurance company”. This framework helps you to apply your option trading strategy to a solid, predictable, business model with consistent returns. For someone who has some knowledge of trading options and wants to become a consistent income earner. The authors provide a complete “operations manual” for setting up your business. Gain pearls of wisdom from both a professional options trader and coach, and from a hedge fund manager focused on managing an options based portfolio.

In any event, I hope you will join me in ordering a copy.  Once I do receive mine I will sit down in earnest and give it a read through.  I'm looking forward to it, in fact. Meanwhile, I'll see what I can do to convince Mark to provide us a bit more insight.

Christopher Smith
TheOptionClub, LLC

Are the "Darkest Days" for the Economy Behind Us?

Monday, November 21st, 2011

"Darkest Days" for the Economy: Behind Us, or Just Ahead?

Economic skies forecast: slowly clearing, heavy rain returning, or cyclone?

November 18, 2011

By Elliott Wave International

Many people still talk about a "recovery," or at worst

only see a possible double-dip recession. But what if

the mistake was to think the economy was only in a recession in

the first place? It can't "double-dip" when it never

truly recovered:

"The respite following the 2009 stock market

low is not a new expansion. It has failed to improve housing sales,

barely caused employment to budge, and hasn't managed -- despite

the unprecedented manufacture of new Fed money -- to get the total

supply of credit back above its 2008 high."

Elliott Wave Theorist, Sept. 2011

Indeed, the Federal Reserve's quantitative easing measures have


The Fed's latest policy plan to stimulate the economy has been

dubbed "Operation Twist."

"On September 30, the Fed started operation

twist, by which it will sell its holdings of short-term Treasuries

and use the proceeds to buy longer-dated T-bonds. The goal is

to foster more credit by lowering long-term borrowing costs. But

last month [we] noted that low rates compound the money-making

problem for banks by reducing margins. 'Historical verification

of this development is obvious from Japan,' says a recent report

from Hoisington Investment Management. 'Normal bank lending functions

are essentially shut down. This risk now confronts the U.S.' The

problem is not the cost of credit; it's demand, which is waning.

Lower rates will have little effect in helping foster enough expansion

to allow the mountain of total credit-market debt built up over

the last 70 years to be repaid, or even serviced."

Elliott Wave Financial Forecast, November


Imagine if the newspapers reported that Bernanke appeared before

Congress and said this:

"'This is the most serious financial crisis

we’ve seen, at least since the 1930s, if not ever.'"

Bernanke did not say that, but his counterpart in Britain

did. As reported by The Telegraph (Oct. 6),

the comment came from Sir Mervyn King, the Governor of the Bank

of England.

The Fed is unable to stimulate the economy, the unemployment rate

is not improving, and housing is in a "triple-dip" in

some areas of the country. What does this mean for the markets

and your investments in 2012?

Elliott Wave International just released a free report to help

you navigate the markets and prepare for what's ahead. You'll

get hard facts, 25 eye-opening charts and 14 pages of straightforward

commentary that will put the volatile market action of the past

months into perspective within the "big picture" to

help you position for the years to come.

Download your free report now.


article was syndicated by Elliott Wave International and

was originally published under the headline "Darkest Days" for the Economy: Behind Us, or Just Ahead?.

EWI is the world's largest market forecasting firm. Its staff

of full-time analysts led by Chartered Market Technician

Robert Prechter provides 24-hour-a-day market analysis to

institutional and private investors around the world.

Triple Top Formqation in U.S. Stock Market Explained

Sunday, November 20th, 2011

(Video) Bob Prechter Explains 'Triple Top' Forming in U.S. Stock Market

This excerpt from the special video issue of the August Elliott Wave
brings you Bob Prechter’s analysis of the triple top
that has been forming in the U.S. stock market over the past 12 years.
Watch as Bob himself explains what this pattern means for you and the markets.

You can get even more analysis – including an 84-year
of stock values – that will help you gain perspective
about the recent market moves with Elliott Wave International’s FREE
, “Reality Check: Studying the Past to Bring
Clarity to the Future.”

You’ll get a glimpse into the in-depth analysis Robert Prechter presents
each month in his Elliott Wave Theorist with 3 excerpts from
his most recent issues.

Don’t let extreme market volatility leave you confused and scared. Prepare
yourself for today’s critical market juncture with your FREE report from
Robert Prechter.

Read Bob Prechter's FREE report "Reality Check: Studying the Past to Bring Clarity to the Future."