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Olga's Options #1

Introduction to Olga's Options


The purpose of this series of essays is to explain and teach how the many tools in the futures and options market can be used to generate speculative income as well as reduce the risk of adverse price change in the cash market. We will endeavor to do this by explaining the vocabulary and strategies in terms you can understand. Do not hesitate to ask questions.


There have been thousands of essays, websites, books and lectures to explain and teach exactly the same thing we are going to cover. The problem has always been everything you have previously read or heard about the futures and options market was authored by someone who forgot there was ever a day in their life when they did not know what a bear was, or a bull, or a long, or a short, spread, or the alphabet letters used to identify the months, etc.


If you pay attention, think about this information and find someone to discuss the vocabulary and concepts presented here, you will be shocked at how quickly this complex and scary material will make sense to you. If you do not talk to someone about it, it will take you a couple years and cost you about 10 grand if you start trading two or three years from now. We have clients who became successful traders in a matter of a few weeks, not because we told them what trades to do, but because they understood how the market worked and managed their risk to profit ratio properly. They already knew what they thought the futures market would do, they just did not know how to use the tools to make reasonable investments, place an order or even open a trading account.


Olga is Roger’s wife. She has been studying technical analysis pretty regularly for four years as she listened to me explain how the futures and options market worked to her and my clients. She has been trading her own account since March 2021.


As with most rookie traders, her initial performance was not encouraging. Like all rookie traders who become successful futures option market traders, she completed the “on-the-job” training because she refused to give up. She kept reminding herself that for every losing trade, there is a winning trade, and she was going to learn how to be on the winning side. It similar to a farmer determined to have a cost or production of his crops below average and sell his crops above average. It takes education and work and she did it.


Jay Ratliff (https://www.daytradefun.com/home_page.html) tells the story of how he lived in poverty for the ten years it took him to learn to be a successful day trader of Wall Street stocks. He has been earning a very comfortable living for decades as a day trader of stocks. For those of us who are farmer-type people, it will be a thousand times easier to learn to be successful trading agricultural futures and options on futures than trading stocks and bonds. A big advantage is leverage with the futures market.


All people who work hard for their money and makes their own decision about that first futures or option market trade, carefully researches all aspects of the market and waits for the precise fundamentals aligning with the precise technical outlook at the precise price. And so it was with Olga. She placed her first order and almost immediately the order was confirmed filled (her order to buy [or sell] was accepted by another trader willing to sell [or buy] at her price). Within five minutes she was losing $225. Olga freaked-out. All she could think about was how hard she worked to earn that $225 and to see it gone in five minutes was incredibly stressful!


Controlling emotions is the hardest part of trading. One will never be a successful trader if emotion plays a significant role trading decisions. A trader, like a farmer, must keep focused on the facts of why they did what they did, even if it looks like it was wrong in hind sight. In which case, review the facts of why the decision to do what you did was made before changing course.

 

Lesson #1


Probably every trade a person ever initiates will be a loser for at least a short time. It is simply impossible to pick the exact top or bottom price of a given’s day’s trading range, place the order and get it filled at that exact price and then market turns immediately in the profitable direction. No one is that good nor that lucky. It might happen twice in a life time… well, maybe once in a life time, but probably never. Expect every trade to be a loser initially.

Accept the fact every wining trade will show a loss, maybe a big loss for a period of time. When Olga’s first trade was losing $225, she was distraught beyond words. Her self-confidence and discipline were shattered. Fifteen months later, she could sleep well at night when she was several thousand dollars in-the-hole. She developed the self-confidence that the vast majority of her trades would make money and the ones that did not make money would be few and far between and she knew she controlled the amount of the loss.

It was just about a year after she started trading futures and options that I knew she would be successful. It was touch-and-go for that first year, but I told her in her twelfth month of trading she was going to be able to trade futures and options the rest of her life and make a profit every year. She has established a consistent successful pattern and as long as she never thinks she is bullet-proof (can’t make a mistake), she will be wealthy woman someday if she builds on her success. A huge part of her success after twelve months of touch-and-go success and failure was her developing an understanding of how to use options as investment tools.

You can also. Again, successful trading is not about figuring out whether the market will go up or down. You already know that and, when you are wrong, the market will convince you are wrong very quickly. Successful trading begins with knowing the vocabulary and how to use the tools. I already explained what it means when order is “filled”.

 

Find someone to talk markets and learn together the vocabulary.

A bull is a person who thinks the market will go higher. Bullish news is expected to make the market price go higher.

A bear is a person who thinks the market will go lower. Bearish news is expected to make the market price go lower.

For every person who thinks the market will go higher and he buys it, there is a person thinks the market will go lower. If no one thought the market would go lower, one would never be able to buy it. Do not ever forget that. No one is “bullet proof” (can’t make a mistake).

If you think the futures prices will go up, buy a call option.

If you think the futures market will go down, buy a put option.

Call up and put down… for the buyer of an option.

Learn how leverage can make you poor or rich trading futures, but buying options eliminates the risk of unlimited loss due to leverage.

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