Option Investor
Educational Article

The Big Picture

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By: David Popper

Over the years, I have been a subscriber to many newsletters. Often, you will read that people consistently earn 25% monthly or perhaps even more. While, I have no doubt that many of these claims are absolutely true, I began to believe that I was trading poorly because I only averaged 8% to 10% per month. My competitive spirit prompted me to strive to achieve the "average" 25% that others were earning. Sometimes I did achieve the 25%, often, I did not. After years of striving to "win", I concluded that the 25% people were full-time traders who had the ability to monitor the screen all day. I also concluded that to achieve such results, one would have to adopt risky positions that had to be monitored in order to be successful. Most importantly, I realized that investing is not a race against others. Instead, it is a marathon towards financial security. This security does not have to be achieved in one month. We need to concentrate on the big picture.

For me, the big picture is different for each account. I have a cash account, an IRA account, and a college account. Each account has different goals and different time parameters attached to it.

In the case of the cash account, my goal is to supplement my income by $8,000 to $10,000 per month. I personally try to achieve this goal by writing OTM calls above resistance and OTM puts below support. Because I have a goal, I do not put any more capital at risk than I need to in order to achieve that goal. I save the remaining capital for occasional buying opportunities on severe dips. I only change my philosophy in this account during those times of steady uptrends such as we saw last February and March. During these times, my philosophy changes from one of cash flow to one of capital accumulation. During these times, I am purchasing stocks and buying calls. This is only a seasonal aberration from my cash flow philosophy, however.

In the IRA account, my goal is retirement. Retirement is twenty years away. In this account, I cannot sell naked positions. Therefore, last year when I traded this account continually each month, I found that I made a significant amount of money during uptrends and would have much of it nibbled away during sideways markets. I realized that if I only traded this account during strong uptrends, I could achieve yearly returns of 75% to 100%. Twenty years of such returns would put even a small portfolio into seven figures. Not too bad.

In the college account, I have five years to achieve my goal. Since again, I cannot take naked positions, I only trade in significant uptrends. One aberration to this philosophy is that occasionally I will purchase stocks on severe dips only to sell them quickly on the inevitable technical bounce. Again, a 75% to 100% annual return will turn a $10,000 nest egg into enough money for any college and post-graduate school.

In short, it is important to establish the purpose for the trading account. It is important not to risk any more capital than is necessary to achieve your purposes. By maintaining this philosophy, you will have cash available to take advantage of severe dips and other great buying opportunities that perhaps you did not have the ability to take advantage of before. Keeping the big picture in mind makes you realize that you are not competing against anybody and it eliminates a great deal of the gambler mentality that can be devastating to an account.

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