FREQUENTLY ASKED QUESTIONS

Q: What kind of strategies do you use?

A: We use a variety of strategies -- primarily the Iron Condor, the Siamese Condor, Short Guts, and miscellaneous Credit Spreads. Options are marvelous tools. They enable you to do almost anything. But, if you don't know what you're doing, they can make your money disappear in a heartbeat. That's why I'm here. To help you learn how options work together -- to teach you how to put the trading percentages in your favor as much as possible. It's not rocket science. You have to want to learn how to make your money work for you instead of you working for your money. I can teach you. Reading through my column archives will teach you and various strategies and prepare you to use these strategies in your trading.

Q: Why is the column called "Couch Potato Trader"?

A. Once positions are entered, they will require a minimal amount of monitoring - unless the positions are threatened. These are essentially "hands off" positions. We put premium in our pockets and let time work its magic. These trades are ideal for people who don't have the time or inclination to be plastered to a computer. Focus will be required when entering a new position or exiting a threatened position.

Q: Can anyone trade these strategies?

A. The "Couch Potato Trader" column assumes you already have an understanding of options, how they work independently and how they work together. The OptionInvestor site has some Option 101 lessons, but you should have some experience before you try the Iron Condor, etc. strategies. Without the proper background, it can be very confusing and very expensive. Rule #1 - don't ever trade anything you don't understand.

Q: How do your non-directional trading strategies generate profits? Where does the money come from?

A: I sell premium to those that are trying to pick a direction. When someone spends $3.00 on an option, he's buying it from someone else. That's me. The percentages say that he's going to be wrong most of the time. If he's wrong, I'm going to be right most of the time. It's difficult, and sometimes fatal, for directional traders.

Time passage is the enemy of the option owner, but the ally of the option seller. Time works in my favor. Options are a wasting asset. They're like a melting ice cube. Options have a specific expiration date. When they expire, all the time value of the option will be gone. Where? Into my pocket, of course. Every day, a little bit of the value erodes away. The closer it gets to the expiration date, the faster it erodes.

Q: Do you sell options at all strike prices and on all stocks?

A: No, I'm very particular about the stocks or indexes I select. I generally prefer indexes. I choose the ones that I believe have the best chance of working in the strategies I use. I don't use a shotgun approach. I'm very specific. There's a method to my madness and to my profits. It's not brain surgery. Believe me, you can do it.

Q: Do you ever lose money?

A: Of course. Even the casino gamblers guess right on occasion. It's a matter of controlling the losses. They're a part of life and a part of doing business. That's what option trading is -- a business! Treat it as a business and you can be consistently profitable. Treat it as a hobby and you'll be serving french fries at the Golden Arches before you know it.

Q: Do your strategies work in all market conditions?

A: No strategy works in all market conditions, but that doesn't mean I can't make money. The market is in a trading range over 80% of the time. It's a matter of recognizing the trading range and applying the strategies. The rest of the time, the markets trend. There are adjustments and variations of these same strategies that I use to position myself to be profitable -- even in trending markets. You can't blindly apply any strategy. You'll learn to be flexible and creative.

There are times I have to be conservative. It's tempting to be aggressive, but not in my best interest. Gordon Gekko was wrong. Greed is not good. In the market, pigs get slaughtered -- and I don't think I'd look good as someone's holiday dinner with an apple in my mouth.

Q: What is your track record?

A: As of this writing, I've been profitable 47 out of 50 months with the CPTI portfolio of trades that are posted on the OptionInvestor website for all to see. I'm very proud of this track record. Will I be able to duplicate this success? There are no guarantees, but I like my chances. I'm confident in the strategies and believe that readers of this column will be able to take this knowledge and apply it to their trading. If you take the time to learn the strategies thoroughly, and if you're not reckless or greedy, you have a real opportunity to become profitable. You need a combination of information and desire. I can provide you with the information. The desire? It's up to you.

Q: How much do I need to start?

A: Some students begin with as little as $25,000 others with $125,000. I post trades with various number of contracts. If you have a small account, you can scale down the number of contracts. If it's a large account, you can increase the number of contracts traded to your comfort level. The larger the account, the more flexibility you have. Every trader is different.

Q: Mike, How long have you been trading and teaching?

A: I've started trading options in 1993 and learned many lessons - expensive ones. The worst thing that could happen to me happened -- I was right in my first four trades. I gained confidence with every successful trade. Before long, I felt invincible and started trading more aggressively. Then - surprise, surprise -- reality set in and I started losing, and losing, and losing. About $200,000 later, I finally realized that I wasn't as smart as I thought. The important thing is that I learned was that I didn't have a clue about what I was doing. They were expensive lessons, but lessons I took to heart.

I re-evaluated my situation and spent almost a year learning and paper trading. Making back the loss was a work in progress and took over three years. I learned much of what to do from making my own mistakes. By reading my column, you can learn from my mistakes and, hopefully, avoid making costly mistakes of your own.

Q: Why do you primarily use non-directional strategies?

A: Because I'm not smart enough to pick directions. For those who think they are, I wish them luck and I'd be willing to book their bets. By using non-directional strategies, we are giving ourselves a much higher probability of success.

To all directional traders, I want to say a heart-felt "Thank You." Why? Because it's your directional dollars that have secured my retirement and buy my groceries, pay my bills, month after month after month.

Q: Don't directional options traders make big profits?

A: It's true that, once in awhile, a directional trader will guess right and make a big score. Even a blind squirrel finds an acorn once in awhile. Las Vegas gamblers may occasionally go home a winner, but where do you think the money comes from for those 40-story casinos? It's the losers. Remember, over 80% of options expire worthless.

Q: Why is it so difficult to profit by picking a direction?

A: Directional option traders have to be right about three things: a) the direction; b) how far they expect the underlying will go; and c) how long it's going to take for it to get there. If they're right about the direction, but wrong about the timing, they can kiss their money goodbye.

Q: Will you be available to answer questions online?

A: You will be able to email questions to me - and please sign your emails. I will address the questions as quickly as I can. Make sure to read the archived articles. Most of your questions will be answered in the content. Just like in school, you need to do your homework to succeed. It may take a little time and dedication, but it's worthwhile. Like anything worthwhile, what you'll get as much out of my column will be in direct proportion to your willingness to learn.

Q: How large of an account do you need trade the CPTI trades?  -- George B

A: Hello George - I started writing the newsletter with an account of $40,000 - $50,000. But, it's not necessary for you to have that much to benefit from our non-directional trades. While I may trade 10-15 contracts per trade, you can scale down the number of contracts to fit your account size. You may not be able to trade all the positions, but will still be able to participate. As your account grows, you can slowly increase the number of contracts you trade. Most of what you need will be for maintenance requirements on a variety of credit spreads. This maintenance can be in the form of cash or the use of margin of other assets -- stocks, mutual funds, bonds, CDs, Treasuries, etc. The less maintenance held against your credit spread positions the better -- and the more efficient use of your trading capital. Some brokers are better than others and maintenance policies vary.  If you're going to trade CPTI strategies, it's important to have a broker that has the right maintenance policies.

Q: I noticed you’re setting up Iron Condors for the next month about a week or two before the current positions expire. In order to model this, would it be considered a conservative approach for me to use ˝ the available margin for the near-term month and save the other half for the next month and put on the position when it is 5-6 weeks out?

A: I never really thought of trying to model something. I just make a point of only using a portion of my available margin for any one option cycle. I keep some in reserve. That accomplishes two things.  If I see an interesting opportunity for the following cycle, I can take advantage of it without having to close a current position to free up margin.  Plus, if the near term cycle presents a problem, I have additional margin flexibility to make adjustments if necessary.

Q: If I want to start investing with couch potato when is a good time to begin? Beginning of a month? Thanks, I enjoy your column. -- Carl

A: I'm glad you enjoy the column.  I hope you're both learning and profiting from it. For most of our strategies, you can begin at, or a week or two prior to, the beginning of an option cycle.  It depends on the strategy you're going to employ and the amount of premium that may be available on the index you're considering. Just make sure you have a comprehensive knowledge of the strategy that you're going to use. Not only do you need to know when to get in, but also when you're going to get out or at what point you're going to make an adjustment -- and which adjustment you're going to make. Trading is not supposed to be exciting. It's supposed to be boring. Once you have all your moves planned (before you even enter the trade), it's just a matter of pressing the buttons -- without emotion. It may be dull, but profitable. Good luck and be careful!

Q: How many and how often do you make trade recommendations?

A: I typically publish between 3 and 5 trades per month. For example, you can look for March expiration trades to be posted 4-6 weeks prior to March expiration.  Sometimes I will have ongoing trades that will span a period of months or even a year or two, depending on the strategy. Anytime there is a new entry, you will be notified by email.  Now, with new management and this new method of posting columns, I have the flexibility to post positions, adjustments, and/or comments more often than my typical Thursday and Sunday dates. You can be sure of two things -- 1) I'm going to do my best to keep the profits flowing; and 2) We're going to have fun doing it! Stay tuned . . .