The Options Course: High Profit and Low Stress Trading Methods / Edition 1 available in Hardcover
- Pub. Date:
About the Author
GEORGE A. FONTANILLS, who received his MBA from the prestigious Harvard Business School, is the cofounder and President Emeritus of Optionetics, the world leader in options education, with offices around the globe specializing in teaching high-profit, low-risk, low-stress options trading strategies (www.optionetics.com). Additionally, George's reputation as "the dean of options trading" has led to numerous guest appearances on television and radio shows across the country. A retired hedge fund manager, he has written and cowritten many books on trading, including Trade Options Online, The Stock Market Course, and The Volatility Course, all published by Wiley.
Read an Excerpt
The Options Course
By George A. Fontanills
John Wiley & SonsISBN: 0-471-66851-6
Chapter OneOptions Trading: A Primer
Trading is an elusive beast to the uninitiated, filled with mystery and complexity. Although trillions of dollars' worth of stocks, futures, and options change hands every day, learning to trade is a complicated puzzle that takes patience and perseverance to navigate effectively. Perhaps you have a friend who has made money or know other friends who have lost money playing the markets. Learning to trade can be the beginning of an exciting new career, especially if you master combining options with futures and stocks.
Many years of teaching and trading have taught me that the most successful investors are those who do not think of trading as work, but as play. Obviously, a love affair with anything you do will increase your chances of success dramatically. Perhaps that's why I like to call what I do "grown-up Nintendo." Making money is just a natural consequence of my daily play.
My systematic approach to trading emphasizes risk management. I know how to spot optimal moneymaking opportunities to increase my chances of high returns from low-risk investments. I share this trading knowledge with individuals throughout the world through seminars and various innovative products designed to foster a strong foundation in options trading in the stock and futures markets.
Stock, futures, and options trading provide investors with the best opportunityto find rewards that satisfy almost anyone's financial objectives. My investment philosophy is to make money any way we can, in any market we can. It's a matter of working with a matrix of trading strategies, developing a feel for how to trade profitably, and learning the tricks of the trade.
What separates those investors who make consistent returns year after year from those who can't ever seem to make a winning investment? Vision. Simply put, the winning investor has the vision to systematically spot good opportunities, while the losing investor simply never developed this insight. Can this vision be developed? Some say that a great investor has an innate sense that drives his or her ability to make money. However, I believe that although there may be a few individuals with this innate sense, most great investors learn by trial and error until they find what works best for them.
For example, many people refer to Warren Buffett as the greatest investor of all time. He appears to have a knack for turning anything he touches into gold. Is it because he is just so much smarter than everyone else, or has he developed a methodology over the years that works for him on a consistent basis? For someone as successful as he is, I would have to say that he has both innate skill and a formula for success. This formula for success can be developed by anyone. The problem is that most investors don't have the persistence and drive necessary to achieve success.
First and foremost, you have to learn how to invest and trade the right way. Typically, most new investors lose money when they first begin due to their lack of understanding of what it really takes to succeed. Many may listen to their stock or commodity broker from the outset and never develop an understanding of the markets. Many more lose money until they realize their main error is taking someone else's investment advice. A word of caution: Just because someone is licensed to take an order and execute a trade does not mean that person has the knowledge to invest your money wisely. Gaining the right kind of knowledge, however, is critical to trading success. Although there is risk in virtually all investments and trades, you can mitigate risks by learning how to protect yourself using innovative option strategies. Once you learn how to manage risk, the rewards come more easily.
If you intend to enter the markets, you'll need to decide what kind of investing/trading you want to engage in. Keep in mind that there is a big difference between investing and trading. An investor is an individual who takes a long-term perspective. For example, if you have $5,000 to invest and you place all the money in a mutual fund-a pool of investments managed by a professional manager-then you are taking a passive role for the long term. If you choose to set up an individual retirement account (IRA), you will more than likely keep it until retirement.
A trader, on the other hand, takes a more active role. Traders may make investments that last for seconds, minutes, hours, weeks, or even years, always looking for an opportunity to move the money around to capture a greater return. Typical traders actively make investment decisions on a continuous basis, never allowing anyone else to control the funds. As a trader, you need to focus on strategies that provide the best chance to create profitable trades. Combining stocks or futures with options provides you with extra leverage; but this extra leverage is a doubleedged sword. Options give you the chance to make a very high return using smaller amounts of cash than futures or stocks require, but this leverage also creates an opportunity for you to lose money just as fast.
The losing traders are those who do not respect risk. To survive in this business and have the opportunity to enjoy the fruits of your labor, you must develop a very healthy respect for risk. Before entering any investment, you should ask yourself four questions:
1. How much profit can I make?
2. What is the maximum loss I can take?
3. At what point will I get out if I am wrong?
4. When should I take profits?
As you make the transition to becoming a motivated, knowledgeable, and successful trader, you will have to undertake a realistic examination of your personal goals, habits, dreams, and dislikes. This step is of utmost importance. Many individuals believe that they will enjoy a certain profession, but then give up before the opportunity to achieve success appears.
You must have a good understanding as to why you want to participate in any endeavor. Why are you taking the time to learn a new profession? What are your goals? What are your strengths? What are your weaknesses? Before you can become a serious and successful trader, you need to search for these answers. Make a list and add to it every day as more things become apparent. Try to be honest with yourself. Keep your highest goals in mind and work toward them one step at a time using your list of attributes to strengthen your willpower to succeed.
The three primary reasons for developing trading savvy are:
1. To achieve more wealth. The number one reason that most people want to become traders in the stock, futures, and options markets is to attain financial rewards. Stories about the large sums of money to be made and the successes of the rich and famous inspire a desire to achieve the same level of financial success. Just as it is a business's objective to produce more cash flow to pump up the bottom line, a trader's objective is to make more money from money. That is how a trader monitors progress. Although "money doesn't buy happiness," having plenty of money sure helps. However, there is no need to make having money your sole goal in life; as far as I'm concerned, that would undermine your development as a well-rounded individual. 2. To improve family life. The ultimate goal, other than trading just to make money, is to create a better life for yourself and your family. The success I have been fortunate enough to achieve through hard work has allowed me to help my family and friends financially when they needed it; I have found this ability to help others very enjoyable. Once you have achieved a financial level where you can live each day without worrying about which bills need to be paid, you will have more freedom to discover your true purpose in life. As an added bonus, you can also afford the time and energy to help others, which will make your life as an investor even more fulfilling. 3. To gain greater autonomy in the workplace or be your own boss. The third most common reason is the desire to break away from a day-today job that has been emotionally and/or financially unfulfilling. This is the main reason I started trading; I needed more than what real estate offered. As I like to ask my seminar students, "How many of you are here to try to get out of a real job?" More often than not, it's better to describe the day-to-day grind most people subject themselves to as an unreal job, since many cannot believe they have to go through the motions each day. In essence, it has become a nightmare.
Whether you enjoy what you are doing today and just want to supplement your income, or you are looking to become your own boss, there is no better profession than that of a trader. For example, I travel extensively and live in various locations. With a small laptop computer, Internet access, and a cell phone, I can conduct my business from almost anywhere, which maximizes my freedom. For me, trading is a dream come true.
THE ROAD TO SUCCESSFUL TRADING
Achieving trading success is not easy. In fact, just getting started can be an overwhelming process. The road to wealth can take many paths. To determine your optimal trading approach, start by making an honest assessment of your financial capabilities. Successful traders only use funds that are readily available and can be invested in a sound manner. It is also critical to accurately assess your time constraints to determine the style of trading that suits you best. If you want to trade aggressively, you can do so using various short-term strategies. If you want to take a hands-off approach, you can structure trades to meet that time frame. All of these choices are less difficult to make if you respect the following trading guidelines.
1. Gain the knowledge to succeed over the long run.
2. Start with acceptable trading capital.
3. Establish a systematic approach to the markets.
4. Be alert for trading opportunities at all times.
5. Develop the fine art of patience.
6. Build a strong respect for risk.
7. Develop a delta neutral trading approach.
8. Reduce your stress level.
Gain the Knowledge to Succeed over the Long Run
You have to have knowledge to succeed. Most new investors and traders enter this field expecting to immediately become successful. However, many have spent tens of thousands of dollars and many years in college learning a specific profession and still do not make much money. To be successful, you need to start your journey on the right path, which will increase your chance of reaching your final destination: financial security. To accomplish this goal, learn as much as you can about low-risk trading techniques and increase your knowledge base systematically.
Successful traders have an arsenal of trading tools that allows them to be competitive in the markets. I have used the word arsenal purposely. I believe that as an investor or trader, you need to recognize that each and every day in the marketplace is a battle. You must be ready to strategically launch an attack using all the resources in your arsenal. Your first weapon-knowledge-will enable you to make fast and accurate decisions regarding the probability of success in a specific investment. Is it incongruous to suggest that trading is war and also that to trade successfully one must reduce one's level of stress? I believe not. The most composed and well-armed opponents win wars. The same is true for traders. In most cases, winners will be more comfortable (less stressed) regarding their ability to win. Knowledge fosters confidence. If you are well armed, you will be confident as you go off to fight the battle of the markets. Increased confidence leads to lower stress and higher profits.
Start with Acceptable Trading Capital
Many investors start with less than $10,000 in their trading accounts. However, it is important to realize that the less you have in your account, the more cautious you have to be. Perhaps the toughest problem is to establish a sufficient capital base to invest effectively. If you begin investing or trading with very little capital, you will assure yourself of failure. Making money in the markets requires a learning curve, and incurring loss is part of the trading process. When it comes to trading, "you have to pay to play." You don't need to be a millionaire, but trading does require a certain amount of capital to get started. In many cases, the brokerage firm you choose will determine how much is required to put you in the game. However, no matter how much you begin with, it is a good idea to start out by trading conservatively. If you invest smartly, you can make very good returns and your financial goals will be realized.
Establish a Systematic Approach to the Markets
The third key to successful moneymaking in the markets is to develop a systematic approach that combines all the weapons in your arsenal to compete effectively in the marketplace. Then, and only then, will you be able to reduce your stress enough to believe in the plan and stick with it. A systematic approach diffuses the inherent madness of the marketplace, allowing you to make insightful trading decisions.
Be Alert for Trading Opportunities at All Times
By opening your receptivity to opportunity, you will be able to find many more promising trades than you thought possible. Where do you find opportunities? Everywhere. When you begin to train yourself to automatically look for trading opportunities in everything you do, you are on your way to being an up-and-coming successful trader.
Develop the Fine Art of Patience
Patience is one of the most difficult aspects of trading and investing and extremely hard to teach. I have to work at applying patience conscientiously each and every day, even after years of trading.
As a professional trader and investor, I have the opportunity to sit in front of computers all day long, day after day. This is another doubleedged sword. Yes, I have the ability to look for promising trading opportunities because I have lots of information in front of me; however, I also have the opportunity to second-guess great trades due to fluctuations in the market that may be unimportant. Therefore, I have learned that the best investments are those in which I have thoroughly studied the risk and reward and have developed a time frame for the trade to work. For example, if I place a trade with options six months out, I try to stay with the trade for that period of time. This takes patience. Of course, if I reach my maximum profit level before that time, I take that profit and get out.
Do not feel that you are at a disadvantage if you cannot trade and invest full-time. This allows you to avoid the "noise" in the market that occurs each and every trading day. Many of my successful students make more money by not watching the markets too closely.
Build a Strong Respect for Risk
You must respect risk if you are to survive as an investor or a trader. Before you ever place an order with your broker, make sure you calculate the maximum potential risk and reward as well as the breakeven(s) of the trade. This will help you stay in the game so you can achieve your goals. Risk graphs, which are explored in later chapters, are important tools for assessing risk and reward.
Excerpted from The Options Course by George A. Fontanills Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.
Table of ContentsIntroduction to Options Trading.
The Big Picture.
Elements of a Good Investment.
A Short Course in Investment Economics.
How to Spot Explosive Opportunities.
Introduction to Delta Neutral Trading.
The Greeks and Option Pricing.
Risk and Margin.
Basic Trading Strategies.
The Nuts and Bolts of Delta Neutral Trading.
Advanced Delta Neutral Strategies.
Trading Techniques for Range-Bound Markets.
Increasing Your Profits with Adjustments.
Processing Your Trade.
George Fontanills' Trading Package.
What People are Saying About This
I have known and followed George's work and contributions to this industry for years. In my opinion, if you want to learn the ins and outs of options, this is the man to consult. He has unselfishly helped thousands of others and could probably do the same for you. (Bill Williams, Ph.D., C.T.A., author, Trading Chaos: Applying Expert Techniques to Maximize Your Profits)
I believe that the cornerstone of everyone's success lies in the quality of their education and steadfast implementation of that knowledge. George Fontanills provides that quality education to those who are willing to learn, and a simple yet powerful method for trading options. (Joe Tapias, President, Trade Center, Inc.)
I have lectured with George at numerous investment conferences. I've seen these audiences captivated and enthralled by George's ability to translate complicated financial concepts down to a basic level. Miraculously, this book brings that same magic to print. I heartily recommend The Options Course to anyone that wants to get serious about managing their own money. (Jon Najarian, President, Mercury Trading, Inc.; Money Manager, PTI Capital Management; syndicated radio personality)
Most Helpful Customer Reviews
The subject of the book was 'delta neutral trading.' Although, I never would have guessed it from the title. There were very good graphs, but the text to back them up was scant. After reading the book, I had a sense of how to initiate a delta neutral trade, but had no idea of how to keep it delta neutral - a feature seemingly important to the author. I finished the book (having re-read some of the chapters) clearly puzzled about how the author initiates and completes a delta neutral trade.