The Tale of Two Readers
Actually it seemed more like 2000 readers but the trend was clear. At the San Francisco money show last weekend we had about 750 readers attend the OptionInvestor pre-event hospitality suite and about 2,750 attend our nine teaching sessions over the three days. I met and talked at length with hundreds of subscribers and most fell clearly into one of two categories. Winners and losers. Maybe a better description would be old readers and new readers.
The old readers were coming up to me and bragging about how much money they were making, what great plays they had been making and what a great market we had been having.
The new readers were complaining about losses, about being stopped out repeatedly, about how much they lost holding over XYZ earnings and how they hoped XYZ would rebound before expiration since the options they owned were worthless.
The picture was clear and it only took a couple sentences from each person to determine in which group they belonged. This is very frustrating for us as writers and teachers. I don't think there is any way to prevent this expensive learning curve completely but we are going to try.
Our experience has taught us that once a subscriber has passed three months they are likely to be with us for a long time. The three month window is based on the pain threshold of the reader and their ability to pay attention to what we are teaching.
Beginning options trading can be a very expensive period. New readers who have heard about some of the very large returns that are claimed within the community and feel like this is an opportunity to steal. Unfortunately it is. The market steals from you.
Options trading is not like stock investing. This is not a buy and hold investment. The time factor is completely overlooked by the new option trader and they rush into positions blindly with complete disregard for entry points or real life expectations of what to expect from the stock.
Stocks go up and stocks go down but time decays constantly. We get emails weekly asking why XYZ stock went up but the XYZ-call went down. This shows a complete misunderstanding of options as an investment. Beginning readers plunge into positions with blissful ignorance and then hold them until they are worthless always expecting them to recover their former glory. Most new option traders are previous stock investors. While entry points are critical in options the same can be over looked in stock investing as long as the market is trending up. Traders that have made money in stocks over the last several years, probably did so even after making many mistakes. The bull market rescued them from failure and in doing so, convinced them they were "stock traders". Nothing could be farther from the truth.
Options trading is not as forgiving. Entry points are critical. Time awareness is critical. Expectation is critical. Market awareness is critical. Err in any of these and losses are bound to appear.
New traders with $$ signs in their eyes are blinded by optimism and hype. They buy a $10 OTM call on a $50 stock after five days of strong gains with 30 days till expiration and then wonder why the option expired worthless. Must have been a bad pick! They repeat this same scenario over and over until they reach their pain threshold and give up on option trading. They compound their problems by holding over earnings events, buying on market tops and over trading by always having many open positions at once. Even though the newsletter tries to teach the right way to trade options, these readers feel we are talking to someone else.
The older readers have paid the price of experience. They got burned and went back to the drawing board to see what they were doing wrong. Most I talked to last weekend were only in the market 1-2 days per week, OR LESS! They waited for the right opportunity and then executed their plan. They were happy and carefree. There was no stress. Several actually got tears in their eyes as they were relating some of their recent winning plays. I talked to dozens of readers who had quit their jobs and were now successfully trading options for a living.
It was a very moving experience to see the joy these traders were having after seeing the light. Unfortunately, every winning trader was offset by the sob stories of a trader who was going through the agony of defeat. This was very painful to all of us. Where some of the winning traders were bragging about the big bucks they made this year, some over a million dollars with triple digit returns, the losers were relating losing their last $2,000 or having to sell things to raise money to keep investing. This gave me a serious case of heartache. I counseled as many as I could and even suggested mutual funds to some. It was still very painful.
The point. Option trading is either very profitable or very expensive depending on your experience level. Unfortunately the only way to get this experience is by trading. We are going to undertake a new project to provide comprehensive educational materials on the website to help new traders, WHO ARE READY TO LEARN, the right way to trade options. Why did I bold that last statement? Because many new traders know everything already or at least feel like they do. The market will make believers of those that don't. When the students are ready the teacher will appear. v For those that want to avoid the painful expense of this education experience I suggest paper trading until you are comfortable with the process. We will start a ten part series on Sunday to try and make the educational process less painful. Until you have developed the confidence you need to trade profitably there should not be a rush to trade. It doesn't cost anything to sit on the sidelines until you are ready. It does cost a lot to invest BEFORE you are ready. The market will destroy you without proper education and preparation but it can't reach into your account and steal your money without your approval.
Until Sunday, Wait for an entry point!