Know Your Options, 2nd Edition: How to Build Wealth Using Proven Options Trading Strategies and Technical Analysis by Bob Lang

Know Your Options, 2nd Edition: How to Build Wealth Using Proven Options Trading Strategies and Technical Analysis by Bob Lang

CHAPTER 1
TRADING AS A METAPHOR FOR LIFE
“I made a killing in the stock market. My broker lost all my money,
so I killed him.”
- Jim Loy
The life of a trader is similar to an athlete’s. You practice, practice, and
practice some more. You learn from your mistakes. You learn how to
manage risk and emotions. You learn how to overcome challenges that pop
up due to your own shortcomings or the actions of opponents. Finally, you
make it into the big leagues, where all that practice will (hopefully)
translate into success and long-term survival.
Survival? You might think I’m exaggerating, but options trading for income
is truly about survival. Unlike many careers that provide some guarantee of
certainty (meteorologists know the weather will change, supermarkets know
people will need food, CPAs know people need to pay taxes every year),
there is no such thing in the trading world. You must rely on your instincts,
protect your capital, and constantly search for new opportunities. You are
always trying to improve your profit and loss (P&L) statement; in fact, this
is your scorecard. If you have too many days when the “L” is greater than
the “P,” you’ll find yourself on the sidelines and out of the action - perhaps
permanently.
Managing your emotional highs and lows is key to surviving, and it hinges
on your ability to control your fear and greed. These are emotions each of
us humans share, and they can get the better of us. When it comes to
money, we want to accumulate more but we are always fearful of losing
what we have. This can cloud your judgment very easily, cause you to
follow the herd, and ruin your performance. In a 2002 study done by
Michael Mauboussin of Credit Suisse, he noted,
“Markets tend to function well when a sufficient number of diverse
investors interact. Conversely, markets tend to become fragile when this
diversity breaks down and investors act in a similar way.”
Survival is also about knowing the odds and placing your bets on the
highest probabilities. Your assessment of the risk in each situation is crucial
to continuing your journey as a trader. There are no guarantees here, but if
you put yourself in the best position to succeed, you at least have a sporting
chance. If you do not know the odds and place a bet anyway, you’re playing
a guessing game. Over the long run, you will lose.
I know of some options traders who manage risk by making a market .
This means they create a buy or sell environment and take on the risk that
buyers or sellers will show up. When they do so, they’ll hedge their bets
with opposing positions, some of which are just extraordinary in size. While
this is a “steadier” way of trading - you do much of the work to remove the
risk - the potential payoff is limited. Yes, you can win bets in this fashion,
but how many of us have an enormous pool of money to work with?
The vast majority of traders are not that conservative. If you want to trade
over the long term, you should use disciplined risk management techniques
(we’ll cover risk management in chapter 7), swing for singles or doubles,
and be surprised when you hit a homerun every once in a while.
In my years of trading, I have seen the rise and fall of many, many traders.
Some have accumulated enormous fortunes from a very humble, small
stake. Some have crashed and burned by taking on too much risk, letting
their emotions get the best of them, or being in the wrong place at the
wrong time. Talent notwithstanding, timing and unforeseen circumstances
often dictate the final outcome. Just like in a championship sports game, the
winner and loser may be separated by one blink-and-you-missed-it play.
If you want to succeed as an options trader, the key to wealth building is not
to hedge your bets constantly. Instead, you want to use tools, techniques,
philosophies, experience and instinct to place directional bets (betting on
which way the stock market is going - up or down). A trader can win
playing both bull and bear sides, but let’s face facts: the long-term trend of
the stock market is up. Play in that direction over a long stretch of time, and
you will be a winner.
Now, I’m not saying that options trading is that simple. Trading is not a
game of perfect, but like a baseball player who can make millions for
failing to hit the ball seven out of ten times, an options trader can show
positive P&L with less than a 50% win rate. It’s not easy, but these traders

Know Your Options, 2nd Edition: How to Build Wealth Using Proven Options Trading Strategies and Technical Analysis by Bob Lang