Options Trading For a Living: You Can Become a Winning Options Trader If You Have These Qualities

so I've studied the successful guys on our options trading desk here at SMB capital over the years and when I look at the most successful traders on the options desk that I manage there are certain skills and character traits that are present in every single one of them says I'm contacted so often by traders who like us to hire them and allocate capital to their trading styles I thought it might be helpful if I share with you today the 10 consistent characteristics of the most successful traders that I manage this could be important for you as you think about what you might want to personally work on to qualify as a proprietary trader or simply to get better at trading your own capital so stick around it's important [Music] hi I'm Seth Freiburg and I'm the head trader of SMB capitals options trading desk SMB capital is the proprietary trading firm located in midtown Manhattan and we provide capital for options and equity traders from all over the world trading both remotely and in our offices here in New York City now you're gonna want to click our subscribe button right now so that you don't miss any of our free trading videos produced for the trading and investment community so like anything else in life putting in options trading desks together is a trial and error process and when we look back on it recently we realized that there were certain common traits that characterized the most successful traders on our trading desk I thought it was important to share these with you today because some of you may be contemplating becoming professional traders so it's important for you to do an honest self-examination so that you can determine if you've got what it takes to become a professional trader and if you don't what steps you'll need to take to become an attractive candidate to a proprietary trading firm that might consider entrusting you with their capital so that's what I'm hoping you'll get out of this video a checklist of things to work on to set yourself up for success as a successful professional options trader and if you complete the full video today at the end of this video I'm gonna make a unique suggestion that I think you could really very personally benefit from and it's free so it's gonna be worth it for you to stick around for the whole video now Before we jump into our 10 key observations about successful professional options traders and what it takes to become one I wanted to mention that we're currently running a 2 our free intensive workshop at the moment where we'll be teaching you 3 real-world option strategies that our traders use including a really simple but incredibly effective strategy that some of the greatest investors in the world like Warren Buffett used all the time plus an options trading strategy that has a statistical 80 percent probability of profit month in and month out plus an option strategy that you can employ with the stock that you like where you'll make your target profit whether the stock goes up goes nowhere or even goes down a small percentage so if that would be of interest to you then you should check out the free options click that currently running just go ahead and click the link that should be appearing now at the top right hand corner of your screen that will open the free registration page in a new window so don't worry you won't lose this video or you can just head on over to options class comm to register for this free intensive workshop it's a rare opportunity for retail traders and investors to learn directly from Wall Street traders but that's exactly what you'll be getting through this free online workshop so click the link to sign up now and don't miss it alright so we're gonna jump in now and take a look at the ten characteristics that we identified in our successful traders on our options trading desk and the very first one is you've got to have a solid theoretical training in options trading you just can't get around that in any field and certainly in options trading equity pricing is very straightforward if the stock goes up and you're long that stock you make money if the stock goes down and you're long long the stock you lose money that's fairly straightforward I'm not saying day trading or swing trading equities is easy I'm saying that it is not hard to understand the basic pricing dynamics but with options trading it's not intuitive let me give you an example suppose you bought a 1:20 call on a stock that was trading at 100 and that stock went to 115 three days before expiration there's a very good likelihood the call you bought has gone down why because you're running out time is running out and so you bought a call stock could have gone down it could have gone nowhere it even went up 15 points and you still lost money on the call so that would be very frustrating for a trader who is used to making directional calls gets those calls correct and still loses money on the trade and that's because there are multiple moving parts in options trading there's time there's volatility and there's price all three of those affect the options price yet you have to have an educational understanding and a proper intellectual framework to understand how each of those affects the price of the options that's different than equity trading and so you have to get a solid educational background in order to become a successful trader you've got to have that proper framework to survive and to thrive as an options trade the second thing we noticed is everyone on our trading desk has at one time or another work with a mentor to improve you can't learn anything in life just by reading a book think about it any of you who are golfers out there and I am the worst golfer in the world but those of you who are golfers would know that unless you take lessons you're not going to be successful if you simply read a book on how to golf and haven't gone to a driving range you're not going to be successful are you you've got to practice and you've got to work with a mentor or a coach in order to become successful and that's true of every successful trader on our desk studies have shown that working with successful mentors is highly predictive of success in the future for traders so it's important and most of the traders on our desk by the way have been mentored by us and that makes sense because we get to understand a traders emotional stability their discipline their skill level their technical understanding their intellectual framework of options training and so it's very very important to work with a mentor to be successful as a trader long term the third characteristic of a successful trader on options trading desk I have to tell you is a little bit of tough love and that is you didn't just start trading last week why do I say this there are many traders who approach us who just had four good trades in a row and they think that qualifies them to become a proprietary trader well it takes a little more than that a little more it takes a lot more experience than that now this lack of experience takes many forms for example there are people I know there's gonna be hard to believe but there are people who have only backtest adoption strategies have never actually traded live and will apply to us for a trading position they think that's reasonable because and and there's a some logic to it if it works out theoretically using live you know historical data why wouldn't it work out in reality and the answer is there's a lot of reasons that might not work it in reality the major one being are you as a trader able to follow your own discipline I know that sounds preposterous but that's actually the major reason traders fail they simply don't follow the disciplines that they themselves developed in most cases so if you've only back tested and you've never traded live you're not ready yet because you don't know how you're gonna react to the market when you're actually trading live I knew of a trader once who used to present make presentations to a group of traders that would meet online once a week and we were all amazed at the various strategies that he was developing two years into this group we realized the guy had never actually traded live everything was back tests it wasn't that he was hiding that from us it's just that it never occurred to him that there may not be legitimacy to his strategies if he doesn't actually get out there and trade them live so back testing alone is not enough at the same time at the same time you also can't only have live traded for a reasonably short period of time why because if you've traded let's say over a three to six month period and you've been successful that doesn't mean you've been exposed to every market situation that can occur you've only been exposed to a very small sliver of potential market situations so if you've only live traded and not back tested your strategy five or more years then you are not going to be successful and so it takes time a mixture of live trading and back testing in order to be a successful trader long term there's not a single trader I know on our trading desk or any other successful trader I've ever met who doesn't do a mixture of live trading for an extended period of time combined with back testing further so that you are validating your strategy farther back in time than the experiences that you've had you've got to be able to trade your strategy through rough markets which will test your strategy and you may even lose money on your strategy in those markets but if the strategy on an annual return basis holds up through a difficult series of market environments then you may have something and you may have a strategy that prop trading firms are going to want to back so let me give you a really good example of this when I first started trading options I had a trading partner we worked in the same office together and I had been trading a certain strategy for four months in a row and after the fourth successful month I walked into his office and I said this is like stealing candy from the baby this strategy is so easy to make money on don't ever say anything like that the minute you say that there's something called the options gods and they will strike you down when you make a statement like that and in fact I got murdered the next month on that strategy there is no such thing as stealing candy from a baby in the markets they're real smart out there you can't steal from them okay you've got to understand that options trading is a statistical game and you're going to win some months and you're gonna lose other months and you are not going to be able to get around that real of trading I had a mentoring student once who referred to a certain strategy that he had traded successfully for maybe two months in a row he called an ATM machine I told him you may never ever speak those words out loud again lest you anger the options gods you can't think like that there are going to be problems at any using any individual option strategy there going to be difficulties so you've got to be aware of that and you can't be cocky let's take a look for example at 2013 the year 2013 if you were trading a bullish option strategy you probably would have made money almost every month and you'd feel like you were a genius and people should give you a hundred million dollars to trade alright how about that same strategy in 2018 when in both February and the final quarter of 2018 were basically extremely bearish markets all right that wouldn't worked out for you very well in 2018 but if you only experienced 2013 and you didn't back test into for example the financial crisis in 2008 you never would have known how bad that strategy could have gotten in the wrong environment and so you've got to have a well-rounded trading experience in order to be a successful proprietary trader at a later point in your career the fourth thing we've noticed about successful options traders is that they have a bread-and-butter strategy now what do I mean by a bread-and-butter strategy a bread-and-butter strategy is the strategy that you rely on in your trading each month so and this may take time by the way for you to find we had a trader on our desk who it took about two years for him to finally find his bread-and-butter strategy and once he was able to find it he was able to be very successful for a sustained period of time because he had developed his bread-and-butter strategy it's his core strategy and what are the characteristics of a bread-and-butter strategy number one it's taken a while to find it number two when you find it every month when you put that trade on in most options income strategies or monthly strategies every month when you put that trade on you feel like you're gonna win you feel like I know how to trade this and I'm gonna win this one now every great golfer also thinks every putt he's making is going to make is going to get the hall they don't all obviously do that but if you have that sense of confidence in that visualization that's going to help you succeed your bread-and-butter strategy is one where you've experienced so much success in so many different kinds of market environments and you've seen it work then you have found most likely your bread-and-butter strategy and therefore you have tremendous confidence that you're gonna make money on that strategy every month when you put that on if you have that feeling about your strategy you may have something you may have a bread-and-butter strategy and finally you've got to know that this strategy is going to hold up through multiple market environments all right multiple market environments if it doesn't it's not really going to be a very good strategy you want one that in the toughest environment for that strategy will make some money and in the best environment of course will make really good money and so you've traded this strategy through multiple markets and you've gained confidence because you've seen that it handled both handled those multiple markets well the fifth characteristic that we've noted of traders who are successful or that they're not trading an account that's too small or an account that's too large on a personal basis most traders come to us having an account that they've established with an online broker and they are personally trading before they approach us that's pretty much a requirement in order to a trader on our trading desk now if you have a $1,000 account that's too small a two million dollar account might be too large we'll have to say it's an adjustment period now why am I saying there's both a minimum and a maximum let's talk about it it's probably a surprise to you but I want you to understand our reasoning if you're trading a $1000 account and you have a 10% loss on your strategy which would be a common maximum loss a common stop on an options income strategy 10% loss you've lost 100 bucks the minimum capital that we typically will give to a trader on our trading desk is $100,000 so that $100 loss translated to a $100,000 account becomes a $10,000 loss okay most traders can't handle the idea of losing $10,000 even if it's the prop firms money that concept of having logged they lost that big compared to what they were used to a $100 loss they just freaked out and once they freaked out they stopped trading in a normal way so if you were down 90 bucks on your $1,000 account trade that account that trade may very well come back and make 80 bucks for you but if you're down $9,000 and you're panicking you may not do the same things you did on the smaller trade that would have gotten you what ultimately would have become an $8,000 win all right because you're freaking out at the size of the dollars involved so that doesn't typically work what you need to do in that case is slowly increase your your capital size on your trading and as you continue to be successful because risk tolerance is a muscle it's a muscle that must be built if you're used to lifting a hundred pounds and then you lift a thousand pounds you're gonna break your body all right but if you are used to living lifting a hundred pounds and then you lift 125 pounds that's a more reasonable transition same thing with trading styles if you start out with too small of an account then it's going to be difficult for us to give you the capital you'll need in order to be successful and at the same time be able to handle it emotionally so now let's go to the other side of the spectrum let's talk about the high rollers all right the high rollers these are guys who have say a two million dollar account and they're used to having daily P&L swings maybe six figures right okay those guys we're not going to start them out with two million dollars of capital typically on our options trading desk so if we give them maybe even two hundred thousand dollars of capital to work with well all of a sudden the daily swings become in the thousands instead of maybe the hundreds of thousand dollars you know what happens those people get bored those meier those losses to them are not meaningful compared to the accounts that they have traded so as a result those are not necessarily successful situations in terms of options traders so we kind of like that kind of happy medium where you're trading it at least say a $25,000 personal account so that if we give you $100,000 you'll be generally used to the kinds of draw downs that you'll experience during the course of a trade and you won't panic but if you are trading two million dollars and you're coming to us for capital you know that may not be a successful situation because we'd be concerned about your basically getting bored and so though believe it or not those are real meaningful criterion that we have gleaned from studying the traders that have been successful on our trading desk the next thing and you're surprised you're probably surprised it's taking me to item six to get this is you actually make money you have sufficient returns what we look for generally speaking is a 24 to 36 month period where you've traded with gains above 30 percent we may have a little bit of flexibility in that but that's what we are generally looking for we also want to see your back tests because three years believe it or not is not enough to tell us whether this strategy is going to hold up long-term we like to see at least a five-year combination of back testing and live trading on your strategy to show us that you are going to be successful not just over a short period of time but over the long haul that the next thing we're going to look at is how that your results compared to our trading desk during those same periods of time if your results were much better or a little better or around the same that's encouraging if your results while the rest of us were doing well was not so good that's not so encouraging and so that is you call that almost marketing on a curve we'd look to see how did you do in the years when everybody had a pretty easy time of it that's going to matter to us in terms of predicting success for you in the future and finally we're going to see we're gonna ask to study from your back tests from your live trading exactly what you have done in rough markets how has your strategy worked in difficult market environments and that's because if your strategy is truly a successful strategy it is going to succeed in multiple kinds of markets now the seventh characteristic that we have noted with traders who are successful in our options trading desk are folks who have live traded their strategies through some kind of a rough market why because if they can handle emotionally trading through a market that's not particularly positive for their trading style then that tells us they have the character necessary to succeed long-term because rough markets are going to occur we want to see not only that you've traded during some kind of a rough market but also that your back test incorporates really tough markets we have a strategy we're trading on our desk right now which actually had its best month during the Great Recession month of October 2008 that you know that horrible horrible month of those of you who will recall that how much value the market was shedding every day was unbelievable volatility in options were going through the roof and those were very difficult times it'd be interesting to see how your strategy would have performed in an environment like that which could well occur again there was also a flash crash in May of 2010 how would strategy have done then how about August through December of 2011 when there was a the sovereign debt crisis in Europe combined with the fact that SP had downgraded US debt that was a rough time in the market that was a five-month roth period how about August 2015 when there was a crash in the market in the middle of August whenever one was on the beach there was a crash due to a Chinese currency crisis how did your strategy do then how about November in December 2016 right after the election that what you'd call the the Trump rally how did you do then and finally in February 2018 there was something we call the volatility apocalypse that's when options volatility exploded in the middle of certain tough strategies how your strategy do then and then of course there was the fourth quarter of 2018 in which basically there was a three-month correction that almost by inches became almost became a correction all right how did your strategies during those periods was your strategy holding holding up on an annualized return basis through those various markets now the eighth characteristic that we have noticed in traders who are successful on our trading desk is they're not just lucky people all right there are lots and lots of ways that you can seem to be successful as an options trader short term and then turn out to be disastrous long term there are strategies called naked straddles and naked strangles now I know that sounds a little strange those are in fact the names of those strategies we're not going to get into what those are right now but if your strategy is based on naked strangles and straddles that is got a lot of danger in it and may succeed short term but will not succeed long term in most cases if you do weekly strategies you can go through a long run of success on weekly strategies and then kaboom something happens that is adverse to that strategy and you may lose everything that you gained prior to that using a weekly strategy so that may not be a successful trader on an options trading to ask someone who trades just weekly strategies it's possible they could be successful but it is less likely we have found in our experiences there are traders who've just got lucky on some longshot trades for example suppose the market had sold off a lot and and just at the bottom you bought some cheap calls all right and then the market rallied and that happened to you once you know that doesn't mean you are a successful trader means you time that one trade right that trade could have gone against you but you timed that one correctly and you got it right you may be the kind of person who can do that on a consistent basis then maybe you will be successful but if you just got lucky a couple times and you had a lucky number of big hits it doesn't mean that that can be replicated over time a very good story or what I call the secret sauce story it's a nickname we have one of the guys around here won't get into that but there was a traitor that I'm very familiar with who traded for a fund and what this one did was they sold way out of the money puts well nine times out of the ten a way out of the money put it's gonna just expire worthless and you'll make money on it but that one time and you only need one of those times can be extremely extremely painful and his firm after having traded this way for a long period of time suddenly out of nowhere went bankrupt and that is because they were trading an unprotected strategy that I had a very high winrate but an absolutely catastrophic downside if you understood how that strategy worked so because you are doing something very unsafe and getting away with it in other words doesn't mean that you will be a successful proprietary trade in fact we think it is an indicator that you will not be successful the ninth characteristic that we have found to be a predictor success on our trading desk is that you are simply a good team player and what do we find in our team players on our on our desk number one they have a passion for the markets they love reading blogs about the financial markets they are well-read they are well-educated and they're into it when they wake up on Monday morning it's fun for them it's not a chore for them it's something that they look forward to they have a passion for the markets secondly you are a hard worker there's no way around that in any path you want to take in your life if you do not work hard for success you are not going to be successful and the folks on our desk are all disciplined hard-working people who do the back testing do the experimentation do the trading they they need in order become successful and to improve all the guys on our trading desk are people who have a passion for learning and growing they're constantly coming up with new ideas that they're proposing to trade different strategies that they are experimenting with that they would like to take live these are people who have a passion for learning and growing and expanding their knowledge base as a trader and finally you're not a jerk we you are a person willing to share your ideas with other people you are a person willing to listen to advice from a mentor or a manager and not be cocky and boastful because the cocky and boastful traders never make it they're most likely cocky and boastful because the markets haven't really tested them they become a lot less cocky and boastful the day they take a major drawdown so you've got to be a good team member to be a successful proprietary trader and finally you are a mature trader now let me tell you what I mean by a mature trader because I left this for last for a reason because it does such a good job of summarizing that the character traits that are necessary to be successful number one you know how to lose that is the biggest weakness for many traders they simply don't know how to lose they can't accept that they're wrong on a trade they can't accept that their trade is not going to come back if they don't take their stop they won't survive as a trader you can't afford to think you can never lose at SMB if you don't take your stop you're not gonna work here for long that's just the reality of our trading desk you've got to take your stops no matter how much you think your trade is going to come back we can't afford for you to be wrong so you've got to be able to lose and understand when you've lost the trade and take your style secondly and this is essentially the opposite point you're not too greedy let's say you have an options trading style that has a 10% target profit 10% of your capital would represent your profit level on that trade now let's say you're up 9 percent on that trade and the next day Britain votes on brexit ok if you're up 9 percent on your trade and your target is 10 percent you better take that trade off because the next day all hell's gonna break loose either way in the market all right and these kinds of strategies are best in calm markets not radically wildly moving markets so therefore you need to take that trade off at 9% the mature trader understands he can't be greedy try to squeeze that 10% out of the trade when something obviously very large and disruptive to that trade is going to happen the next day a positive trader also our successful trader also knows when not to take profits alright when not to take profits if you've been down 2% on a trade and you're up a half a percent couple days later and your strategy calls for you to make 10% as your profit target just because you've been down for a while and now you're up an immature trader just pulls that trade off a mature trader will say alright trade starting to work now we're gonna let it continue to work and we're going to let it breathe and we're going to let the trade become successful mature traders know how to not pull trades off too early you're responsible trader that's part of maturity you prepare for the market day all of our traders know an hour before the market opens what is going on with futures if we're having a big sell-off overnight for some reason some tweet something happened and the markets freaking out you got to know that you can't know that one minute before the markets open 8:30 a.m. Eastern time every day I know exactly where the futures are and I am beginning to develop my pre market plan that's an upside plan and a downside plan for what's going to happen in the market and I'm going to in many cases set up my complex order tickets with my op with my options platform in order to make sure that I can respond in a timely fashion to things I need to do on the trades I have an economic calendar I'm aware of when the non-farm payrolls is going to be announced when there's an FOMC meeting when FOMC minutes are going to be released when major speakers in the financial world are going to speak I'm going to be aware of those things and I'm going to trade accordingly I'll have a disaster recovery plan I was one day trading at Starbucks in the middle of a snowstorm in Philadelphia where I live why because the power went out in my building I had to drive over I knew where the Starbucks was I had a plan I knew exactly what I needed to trade from Starbucks and there I am with the Wi-Fi trading at Starbucks why because I had a disaster recovery plan and I planned ahead finally occasionally you won't be in the office but you'll have live trades on you got to deal with that you either have to know how to put contingent orders in with your broker or you have to have what we call trading buddies on our trading desk every person on our trading desk has another trader who will jump in when they are not available and monitor their trade should anything untoward happen you've got to have this kind of maturity as a trader to be successful on a proprietary trading desk the in summary the successful traders are the ones who focus on risk management options income trades have a high winrate we say typically they will win 9 out of 12 months in a year so winning is the easy part on these trade believe it or not the hard part is controlling the losses in the losing months the traders who are successful know how to control their losses it's not fun to take a loss but they're mature individuals and therefore they know how to take a loss and they know that in the long term their returns are gonna be great if they take their losses on time what if I failed this test if you were sitting there taking notes asking yourself do I fit into these categories or not you probably had one at least that you were not qualifying for all right this is what the perfect candidate looks like but nobody's perfect there is no perfect trader out there there's no perfect person out there the question is have you gotten nosed on a lot of the answers do you have a preponderance of no answers that could be problematic if if you flunk most of these questions you're probably not ready to be a prop trader quite yet but these ten self analysis questions could be predictive of whether you'll be successful or not we have found and in fact they are so what do you do if you flunk this test did you just give up know anyone who has any kind of a determination in their life is not going to just give up it may be that you have to take certain steps you may need to get a deeper education if you're a dabbler you're going to lose you've got to get a serious education in option trading maybe your education has not been as solid as it should be you may need to get an options trading mentor all right that may be the thing you need to get you over the hump of certain technical and psychological reasons that you're not succeeding good ideas to join an options trading community there are a number of them and that way you can mix with other options traders you should chat with other options traders for example in our options tribe that we here have here at SMB we have a Skype chat and our traders tried to during the day and share ideas that is a way to get to know the way professional top-flight options traders think you need to find your bread-and-butter trade that's another suggestion I have for you which is if you are trading a wide variety of strategies you may become a jack of all trades and master of none you've got to learn how to become a trader focused on a couple strategies that really really work for you very well on a consistent basis so you may need to find your bread-and-butter trade that may be the missing link for you you haven't quite found that yet and as a very practical issue you got to keep careful records no one is gonna talk to you no one is gonna talk to you at a prop trading firm if you can't prove your assertions as a trader so you got to keep careful records particularly of your bread-and-butter strategy so there are ways of overcoming every deficiency you may have to qualify as a proprietary trader but you've got to put the work in remember the famous Chinese philosopher Lao Tzu said a journey of a thousand miles begins with a single step so even if you are very far away from having the characteristics we talked about today is a successful options trader nonetheless you can begin to take the steps necessary now just to remind you as I said earlier if you enjoyed this video and would like to learn three real-world options strategies that professional options traders use all the time then you should check out the free options clips that we're currently running just go ahead and click the link that should be appearing now at the top right hand corner of your screen that's going to open the free registration page in a new window so you won't lose this video don't worry or you can just head on over to options class comm to register for this free intensive workshop it really is an unusual opportunity for retail traders and investors to learn directly from Wall Street traders but that's exactly what you'll be getting through this free online workshop so click the link to sign up now and don't miss it okay so as promised here's what I'm gonna offer you I'd like you to comment below as to which of the points I brought up in this video immediately struck you as a trait that you definitely don't have and you feel you need to work on I'll go through every single comment made and I will make a suggestion for you personally on a solid next step for you to work on that issue if you take the time to comment below so please do it it can only help you

Channel: SMB Capital

Views: 54,193

Rating: 4.8701301 out of 5

Keywords: options trading for a living, options trading for beginners, options trading for beginners td ameritrade, trading spy options for a living, options trading, options trading careers, options trading explained, options trading strategies, trading for living, technical analysis for options trading, options income, options income strategies, options income trading, day trading

Id: 25ej9CwzTGQ

Length: 40min 52sec (2452 seconds)

Published: Wed Oct 09 2019