Options Trading Tips: Ten Things I Wish I Knew Before I Started Trading Options

options income trading is not that difficult to learn and actually has a much higher win rate than almost any other form of trading I'm the head trader of SMB capitals options trading desk here in New York City and I can tell you from experience that while it's great that options income trading has a very high winrate there's actually a danger to the win rate in a trading practice being too high now I know that may sound counterintuitive but it's actually a very important principle to understand so stick around because there's some really important lessons in this video that will save you a lot of money and frustration in your trading journey if you take them seriously and internalize them [Music] hi I'm Seth Freiburg on the head trader SMB capitals options trading desk SMB capitals a 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 I'd like to suggest that you click on our subscribe button right now so that you don't miss any of our free trading videos that we produce for traders and investors all over the world they're really very valuable ok so a few years back I was in a mentoring session with one of the top traders on our trading desk is a very bright successful guy in fact he's a very senior manager for the US operations of a manufacturing concern in New England all the guys on our trading desk have full-time professions yet they're still able to successfully trade for our desk remotely because of their intelligence their skill experience and trading styles one of the reasons that this guy is so successful is that he uses every opportunity he can to learn and grow professionally and this applies just as much the trading as it does to everything else in his life so he and I were just finishing up a series of one-on-one mentoring sessions some time ago and at the end of the second-to-last session he made a special request that in the final session I basically provide him with a brain dump of the most important lessons that I had learned during my personal trading journey that turned out to be an incredibly interesting exercise and so I'm here today to share with you the answers that I prepared for him based on my own experiences some great others painful but I was determined to steer him clear of many of the mistakes that I had made early on so that he could grow to be successful quickly and avoid the pitfalls that many other traders fall into I think it's really important that you watch this entire video if you're serious about becoming a professional trader this video is about the real issues that professional traders face and I could almost guarantee you that during your journey as a professional trader you will face each and every one of these issues and you will get through them a lot more successfully if you take good notes and believe what I'm telling you here this is the real deal and the really crucial issues that you've got to internalize to be successful alright so the first lesson this critical critical lesson in my session with this mentoring student was the question of this feeling of invincibility that traders get at one point or another when they've been training successfully when they're on a winning streak of some sort now Warren Buffett said get scared when other people are greedy and get greedy when other people are scared now what does that mean what that means is when other people are driving up the prices of stocks to ridiculously and undefensible levels then it is a very bad idea to start buying stocks at that point on the other hand when everyone is running from stocks terrified dumping them in droves those are usually when there are some really really great values all right well when you start feeling invincible when you start going into what I call irrational exuberance those are the times that you should get very scared and you should be very cautious now during these times when you have been on a winning streak the last thing you want to do is increase your capital at that point why options income trades are statistical in nature there's going to be a certain number of wins a year and a certain number of losses in a year many more wins generally than losses so if you're on a winning streak and you increase your capital you know as you continue to have win after win after win you're just that much closer to the inevitable losing month okay so therefore for you to increase your capital as you're winning will basically lead to disaster and so you should never increase your capital because of a winning streak you should increase your capital because over time your strategy has been successful but any one given winning streaks shouldn't get you irrationally exuberant I had a student who referred to a particular strategy I had taught him as an ATM machine why did he call it an ATM machine because he happened to have wanted three months in a row well this is a strategy that's gonna win nine months out of the year so what did he do he increased his capital at the end of the third month and one of the predictable losing months then followed when he was in a maximum capital situation so you can't assume because of a winning streak that that winning streak will occur forever it's a ridiculous concept and if you double or triple your capital and I've seen much much worse than that after basically a short predictable winning streak you're gonna come to regret that and so no options trading style is an ATM machine please get that concept out of your mind if it was true everyone would quit their job and start doing that strategy it's not that simple all right if you get cocky after a winning streak it's really really dangerous and I've been there personally I will tell you with some shame that when I first started trading after a winning streak of six months on a particular strategy I quadrupled my capital quadrupling and what happened you all know the answer to that question the month I quadrupled it I got killed on the strategy giving back almost everything I had made had I just left my capital level as would be a sane and intelligent thing to do it would have been a small dent in an otherwise great year instead I had a return year that was abnormally low because I was foolish with my capital if you increase your capital after every win in options income trading you will end up giving back everything you made because these are statistical trades and there's going to be a certain number of losses predictably occurring in every year so when you start four invincible get very very scared now the second point we discussed that day was the following reality trading large amounts of capital is different than trading small amounts of capital now let me draw draw this point out for you and give you a very specific example let's say you've got a trading strategy where you allow yourself to get down 10% on the trade before you exit all right let's say that's your that's your stop on the trade is 10% so if you're trading a $10,000 account and this strategy takes up all of your capital then you will have a $1,000 stop on the trade all right well if you have much more net worth than $10,000 then a $1,000 loss this is probably something you can handle emotionally and certainly you can handle it financially all right when you start trading firm capital if we give you a million dollars for example or I'm sorry a hundred thousand dollars for example and now you have the same exact strategy with the same components to it the same risk reward characteristics and a 10 percent stop you will you will get to nine thousand dollars and still be in the trade you'll be down nine thousand dollars and still be in that trade if you've been used to only getting out of trades at a thousand dollar loss and now you're at nine thousand dollars and you're still in the trade a lot of traders can't handle that because they are not used to those kinds of dollars yet risk tolerance is a muscle that has to be built so you cannot dramatically increase the amount of capital that you are trading all at once you will freak out and when you freak out at the size of your drawdown even though it's completely normal for that strategy given the size you're trading you will get out of the trade early and most likely have denied yourself the possibility of a win instead you locked in a unacceptably large loss given the fact that you should have won on that trade all right so trading large amounts of capital is not the same as trading small amounts of capital emotionally psychologically it's a very different process so you'd have to build up to that point traders get more nervous and this is an ironic point trading our capital then their own capital there are a lot of psychological reasons for that you're being watched you have a need for approval you don't want to be seen to be failing another in front of others there's lots of reasons for why you get more nervous trading other people's capital than your own ironically but nonetheless that is a a reality so there is a difference between trading your own capital in small amounts and trading firm capital in large amounts if your strategy ain't broke don't fix it let's think about it why didn't we hire you in the first place - but the major reason we hire traders is because they've successfully been trading a particular strategy for some period of time why would we want them to change their trading style when they come trading for us that is the last thing we want them to do we want them to continue that and simply do it with not only their own capital but our capital also all right if the strategies not broke don't fix it that is a tendency to avoid when you start trading for an a firm such as ourselves which will supply you capital we want you to continue trading in that style which means you're going to have larger dollar draw downs but from a percentage standpoint you will stay within your disciplines and most likely continue to experience the same success as long as you stay within your trading style but if you panic out of trades because the dollar amounts are much larger than you're used to then you're hurting yourself and you're hurting the firm also execution is also different with larger amounts of capital for example let's say you have a ten lot iron Condor all right to close that you'll most likely get filled all at once someone will come in and boom take out of that trade if you have a 500 lot you're not necessarily going to get filled right way you're more likely going to get piecemeal doubt you'll get filled slowly you may have to change the price make it a little bit more attractive to the market to get out of that trade so large amounts of capital trade differently both psychologically and technically than small amounts of capital so you've got to understand that whether you'll be increasing your own capital level or increasing someone else's capital levels such as a proprietary trading firm like ourselves before we move ahead to the next point which is an extremely critical point that I really wish someone had told me before I started trading options I wanted to mention that we're currently running a to our free intensive workshop at the moment where we'll be teaching three real-world option strategies that professional options traders use including a really simple but incredibly effective strategy that some of the greatest investors in the world like Warren Buffett use 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 those strategies would be of interest you then you should check out the free options class 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 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 com 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 now the third really important point you need to understand and what I discussed with this mentoring student that day was that back testing a strategy is not the same as live trading what is back testing back testing is a technical simulation of that strategy as though a robot we're doing it well guess what you're not a robot you're a human being and you have emotion and so a backtest is not a technical is not an emotional simulation it's only a technical simulation how are you going to turn it into an emotional reality you got a trade live capital that's no way around it so assuming that a backtest is going to come out exactly the same as reality is a foolish assumption because everyone has emotions so you have to take that into consideration when you're contemplating trading a strategy furthermore when you're trading there are certain issues that you may not pick up on in back-testing for example slippage what is slippage it's where you can't get the market to agree to accept the mid-price between the bid and the ask all right you're gonna have to pay a little more for debits or accept a little less for credits in order to get it done that's what slippage is called that may not have been reflected in your back testing secondly this is the real world you're gonna have execution errors you're going to set the trade up wrong you're going to buy a hundred shares instead of ten shares if you were day trading or by a hundred credit spreads excuse me 100 debit spreads instead of ten debit spreads all right these things are going to happen especially when you're starting all right executioner's you're not making any execution errors in your back test right but you make them live that's the real world these things happen another thing that happens is when you start trading capital for proprietary trading firm or even just increase capital for yourself you start finding yourself locking in trading profits because the profit numbers start getting large but they're not really large relative to the amount of capital you're trading with your trading much more so what you end up doing is cutting your wins or when you should be allowing those winds to continue to turn into profit and increase their profits over time which then creates that Bank I call door buffer for the inevitable losing trace all right you've got to still come out with a great return net of the losing trades well if you keep cutting your winning trade short you're not going to have enough in the bank for an absorption of the the losing trades and still get the great returns that you're expecting all right so these are all things that happen when you trade live there's a mixture of technical and emotional issues that come into play that make your back tests different than what's going to happen in reality controlling emotions is the major determinant of success in any trading style please trust me on this if you learn how to get your emotions out of control under control it's 50% of the battle at least at least it's probably more than that and so you have to learn how to do that now there are various ways we could do a whole video on that subject but you can do mindfulness training you can do visuals that visualizations which is taught here at SMB breathing calmly in your mind through various market scenarios so that you don't overreact to them one way or the other there are various ways to go there are tools to use to get your emotions under control but you've got to get your emotions under control or you can't succeed successfully as an options trader the fourth principle I went over with this trader is the concept of consistency be consistent as a trader but don't be foolish ly consistent now why do I say be consistent why you have come trading for us in the first place why we have invited you to trade for us in the first place or why you are successful using your own capital is because you have found a strategy a core strategy which has been successful for you repeatedly over a long period of time alright so if the basis of your trading is a solid strategy why are you going to deviate from that right why would you do a t' from something that is working well alright so you plan your trade for godsakes trade your plan as the old expression goes plan your trade and then trade your plan if you do that repeatedly over time for proven successful strategies you should continue to have success if you bail out on a good system because you've back tested it for five years it looks great the first month was a loser and you give up on the strategy does that make the slightest bit of sense you know that over that 60 month period that you tested it you had twenty percent of the time losses the fact that that loss occurred in the first month you traded it live is irrelevant to the long-term success of that strategy it's basically irrelevant alright so if you don't if you give up on a strategy because you just have a little bit of bad luck in your first month and it was not successful in that first month then you are an immature trader and you should get mature and understand that when you lose on a backtest then you trade it live you're gonna lose live too when you win on a backtest you're gonna win live too but the losses are real and the wins are real alright it's real money and so you have to understand when you make that transition from a backtest into life that you're gonna have to adjust to the fact that this is now real money on the other hand you don't want to be foolishly consistent foolish consistency is the hobgoblin of small minds as the expression goes what does that mean it means it's good to be consistent but if you're consistent when it's ridiculous to not alter your thinking at all then you're you have a small mind all right so what do you want to do and let me give you a good example let's say the market you're up 9% on a trade where your target is 10% and the next day there's going to be a major announcement like a big vote on pregs --it or a highly anticipated FOMC meeting or a major jobs report or something that has become extremely serious and the whole market knows it in the whole market is waiting for the answer to that issue all right under those circumstances you're up 9% of the trade you know there's gonna be a big move the next day of some sort or another because of the big decision that's being made all right get out of the trade you don't need to squeeze out that extra 1% when you're almost certain to be struggling to get back to that 9% because of the event that's happening the next day that's the kind of thing that is foolish consistency you're up a great deal of money on the trade don't expose it to a large event when you know it's gonna cause a struggle the next issue I discussed was a subtle one psychologically and that is many times if you're stressed out in the middle of a trade you'll do something to make you feel better feel better means you do something to cut the risk of the trade down so that you're not so scared okay well there's a problem with this and the problem is if your system works fear should not be the decision-making factor fear should not drive your behavior if fear is driving your trading decisions you cannot be a successful trader long term you've got to have faith in your system and see it through without fear there was a famous book written about trading called the way of the turtle my Curtis faith it's a great book in the first couple chapters he talks about this opportunity he got to work for a prop firm and what they told him was you're all asked to simply trade the way we're teaching you we don't care if you lose money or make money on any given trade any given week even we just want you to follow the system that we're teaching you if you do that you'll you'll be remain employed here if you don't do it you will not remain employed here he was amazed at the fact that the majority of the traders on that trading desk despite that assurance could not trade the way they were being taught to trade they varied it because of emotion all right and because of that long term they were going to be unsuccessful whereas if they simply followed Weis trading advice they would have been successful it's a great book you should you should read about that experience and internalize that one of the many reasons people alter from their strategies is because they're trying to preserve Minor Prophets many many trades will go up 1% and then down 3% and then up 4% and then down 2% till they finally end up up 10% but if in any of the minor up cycles you got out of the trade you'd be sacrificing large amounts of return for the year you don't want to do that you've got to build your bank as I was talking about before so that when you do inevitably get drawn down through some extent you'll have plenty left in the bank for a great return for that year and the worst thing you can do is panic out of a trade with options particularly that guarantees the worst possible execution if everyone is running to get out of the trade at the same time you're gonna get the worst possible price for whatever you're selling okay you will most likely get the worst outcome by panicking even if the trade will be a loss of six percent if you hadn't panicked if you panic it'll be ten percent it's still going to be a loss but you cost yourself in that example four points of return so panicking out of trades never works even if it makes you feel better it is not going to make your your boss feel better if you are your own boss you're trading your own capital your return will be worse if you panic out of trades it's critical to not make decisions because it's going to make you feel better but because your system supports that decision the next point we went over is losing successful traders know how to lose well ego is a major reason that many traders fail they simply can't accept that they're losing on a trade they think they're great traders so they think being a great trader means you don't lose that's childish kindergarten thinking you are going to lose you must take your stop you want to know something at SMB if you don't take your stop you're not going to be working here why we don't care that you lost we care that you didn't have the discipline to follow your system that's a capital offense in SMB not taking your stop losing is not a capital offense the greatest traders here are losing all day ok not taking your stop means you have a character flaw you're not following your disciplines you're not following your system you've got to live to trade another day you will only live to trade another day if you take your stop all successful systems have losing periods of time in fact if they didn't have losing period as periods of time you wouldn't be able to make any money trading think about it if you sell a put alright the only run reasons someone's buying that put is because there is a fear that the stock will get down to that level okay well guess what every once in a while the stock gets down to that level and you will lose on the put that you sold all right but statistically the stock is not normally going to get down to the level of the put that you've sold in this example and so therefore you're going to make money on that trade most of the time all right the fact that you occasionally lose is why anyone would buy that put in the first place all right I used to be in the insurance business for a very long time I was the CEO of a property and casualty insurance company that went public all right during soft markets which are periods where the prices drop everyone would be hoping that there was a sense terrible to say hoping that there would be some catastrophe somewhere in the world an earthquake a hurricane whatever because that has a tendency to bring insurance prices up why because people remember oh yeah we can have hurricanes oh yeah we can have quotes we better buy insurance for that all right well if you never had a hurricane and never had an earthquake nobody would buy insurance there wouldn't be a business shouldn't that prove to you that losses are the reason we're in business the fact that we can write calls and write puts means that we are in business as options traders and therefore since it's the reason we're in business occasionally we're gonna have a loss you can't get depressed about losses as long as you're staying soundly within your system and acting in a disciplined way losing is normal by the way oftentimes the best months of the year are followed by a losing month so if you bail out of your trading strategy right after losing month you are often giving up the very best month of the year so successful traders know how to lose they know how to take a stop they know how to handle it emotionally and they know how to move into the next month the next point we talked about is a sense of technical point diversification of your strategies is is very very helpful and very important if you trade one strategy that gives you one set of outcomes that will be optimal for your strategy but if you have a series of strategies that balance each other that's the best combination there are three things that effect options pricing time the price of the underlying asset that is being traded that the option is derived from and volatility alright the best portfolio of monthly strategies is a mix of trades that will respond well to very movements in those three factors time diversification is the first one if you have a series of trades that start at different times 160 days out from expiration 145 days out from expiration 130 days out from expiration then you're going to catch the market at different points and you'll heighten your chance of one or more or hopefully all but at least some of those trades being profitable because you're catching different points price points in the market all right the second type of diversification is a volatility diversification and that means that there are certain option strategies which respond well they respond well to reductions in volatility and they there are others that respond well to increases in volatility the best mix of option strategies is a combination of trades that have essentially offsetting reactions so that you always have in your mix of trades a strategy that will respond best to an increase in volatility combined with one that responds poorly to an increase in volatility that will help to smoothen your equity curve finally price volatility now there in general option strategies have a tendency to do a little worse on the downside than the upside so there are certain strategies that really respond very well to downside moves and other strategies that respond better to rallies for flat situations so an ideal mix of options trading strategies is a mixture of those that respond well to big down moves and those that respond well to up moves as well and I would say you want to lean a little bit towards the one that we're the ones that respond a little bit better to the downside because of the fact that the worst scenarios in options trading usually do occur to the downside so you will probably want to lean a little bit in that direction and I say this in the middle of a historic bull market but what I stay has held true even through this historical market the eighth thing we talked about was keep it simple there's a kind of a trade I call an octopus what it is is the trader has been in the trade for 30 45 60 days and he has held on to the trade and every day he can't help himself but add a new little tweak into the trade alright so before you know it after half the trade period is over he's made it a really really unnecessarily complicated strategy which means when he has to exit this it's going to be complicated the more complicated you've made the strategy or the trade the more it is going to be very difficult for you to exit it with anywhere near the profit that you had when you started exiting you're going to experience more slippage because you've got to make more moves to get out of it you're gonna pay more commissions and finally you're going to take the risk of large numbers of execution errors I've been in trades before I learned how to simplify things where I had to exit 5th through 15 different executions to actually exit it took me about an hour to plan this out alright if you have execution errors on even one or two of those 15 steps it's going to be very tricky and complicated to rectify those steps in the middle of an execution and so the simpler the execution the better a complicated Rexach yueshen requires extensive planning and if you're unwinding a large complex position then you're really taking a lot of risk and so if the position gets too complex what I advise this trader is towards the end of the trading period start to simplify their techniques we can teach you where you can simplify the trade so that by the date you're actually exiting it you only have two or three transactions instead of 15 in order to exit the the trade so keep it simple was my eighth piece of advice for this trader the ninth is really really huge and that is the practicing of patience patience is critical in all forms of trading and in all phases of your trading career you've got to have career patience if you have a full time job right now and you're just getting started trading you can't quit your job right now you've got to understand trading better and you've got to have more screen time and experience trading better until you ultimately are in a position where you can trade full time either using your own capital or wit or working for a prop firm like ours all right you've got to have patience with your learning process and you can't take ridiculous career risks when you don't even know if you are a quality trader yet or not secondly once your trading when you're in execution situations where you're it's time to make a trade you've got to have patience there's a certain price that is the right price for a strategy and there's another price that's over paying for it you will normally get the opportunities to get approximately the right price if you have a little bit of patience if you just jump in without having any idea of what's an appropriate price for your trade you're not going to be very profitable Pro traders are really really good at being patient about execution sometimes they will take I've seen guys take three days to get a fill on a strategy if you have that kind of patience you're likely to be successful you've got to have patience with your learning curve the fastest trader that's ever traded for us that came to work for us was trading for six months that's the fastest I've ever seen okay I've seen people take as long as two years before they get their stride find their bread and bed bread and butter trade and start to the trade successfully so you've got to be patient with your learning curve and you have to plan around a 6 to 24 month period where you're still learning to become a successful trader and finally and I cannot emphasize this enough capital sizing patience you've got to understand that you can't expose large amounts of capital to the market until you've been trading for a while a while 12 months 18 months 24 months because you may not have seen all of the things the market can do to your strategies in a short period of time so if you have a lot of capital and all of a sudden something expect unexpected happens you're in trouble all right with a lot of capital on the line because you were foolish and increased your capital too quickly I'm begging you to increase your capital slowly plus it gives you the ability to build your risk tolerance which is a muscle that has to be built over time so that you don't freak out when you're down ten thousand dollars on a trade because it's the same as being down $1,000 before all right capital sizing patience is completely critical please believe me on that and I end it this way because this is a warning it's funny but it's also a warning the first options mentor I ever had told me this one day the market can do whatever the hell it wants to do whenever the hell it wants to and if you don't believe me look at the flash crash that happened in May of 2010 where there was nothing going on and suddenly out of the blue the market went wacko nuts no one would could figure out why and the whole thing bounced back by the end of the day alright you could have been out playing golf eating lunch or whatever and that would have happened and that could have been very costly all right you've so what does that mean it means you have to plan for the worst-case scenario you've got to be ready for it you've got to have exit orders in ready everyday weather it seems like a calm day or not because you don't know you don't know if something unexpected can happen options income strategies are built to win most the time meaning that if you leave your desk and you go out and you goof off for four hours you're risking your livelihood by doing that if you don't have conditional orders in with your broker or some kind of preventive measure to make sure that if something unexpected happens you are going to be able to address it promptly the key to long-term success in options income trading is controlling the size of losses look you're going to win most of the time these are wide trades designed to have winds and lots and lots of different kinds of scenarios all you have to do is not let your losses get out of control and you should have a really really good return all right but if you get let your losses get out of control because you were sloppy that's terrible that's a lack of discipline honestly it's a lack of character and so you've got to control the size of losses it's easily done if you take the precautions so the key the technical T key to long-term success and options income trading is being aware the market can do whatever the hell it wants to do whenever the hell it wants to and you have to be ready for it now I'm truly hoping that you've taken this video seriously and if you use a trading journal you should consider really re watching this video and taking notes these are principles that I've developed from observing and teaching hundreds of traders for more than a decade and the patterns distinguishing successful unsuccessful traders are undeniable if you want to trade for a hobby then you can fool around and ignore this kind of advice if you want to become a professional trader a serious professional who treats this like the business that it is then you do well to really think about and accept these ideas internalize them so that you can set yourself up for long-term success as a professional trader which is the kind of trader a firm like ours would want to entrust with our capital and back with our capital now just to remind you as I said earlier if you enjoyed this video and learn something valuable from it and would like to learn the details of three real-world option strategies the professional options traders use all the time then you should check out the free options class 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 will 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's really 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 ok so now it's your turn take a look at each of the 10 points that I shared with my mentoring student who's now as I said an extremely successful trader for us and tell me which of those points is the one that you think you're struggling with the most I'll try to briefly reply to each comment made so go ahead and take advantage of this opportunity for me to provide you with a little bit of personal input to help you to grow as a trader that's what gets us up in the morning at SMB it's helping more and more traders to become successful and achieve their dreams

Channel: SMB Capital

Views: 648,686

Rating: 4.8713455 out of 5

Keywords: options trading tips, options trading tips & tricks for your profit maximization, options trading tips and tricks, binary options trading tips, options trading, day trading options, day trading options for beginners, smb capital

Id: MmryR1iu9dA

Length: 42min 35sec (2555 seconds)

Published: Thu Oct 31 2019