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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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Most new investors and traders, whether they are beginners or professionals, usually lose money for two reasonsAn investment in knowledge always pays the best interest. Benjamin Franklin Most new investors and traders, whether they are beginners or professionals, usually lose money for two reasons. First, they do not have a grasp of how the markets really work. Second, they are un der too much stress when they trade because they fear losing money. Many times, traders liquidate good trades too quickly or have no idea when to take profits. But learning to trade successfully is not an impossible task. This book is designed to build your knowledge base of the markets to a professional level and to provide you with strategies that make money in the marketplace. My trading program is the result of many years of trading experience, as well as many years of research and development, all in the pursuit of developing the optimal methodologies to trade the stock, options, and futures markets. Students often ask me how I got started as a full-time investor. Perhaps like you, I was looking for an opportunity that would allow me to achieve my financial dreams after a long road of despair. After attending high school in Miami, I felt a college career was necessary to become successful. Although I questioned what success really meant to me and whether college would bring me that success, I settled on the University of Florida in Gainesville for the wrong reasons. It was close to home and all my friends were going there. One day, after just a few semesters, I woke up having difficulty breathing. I went to the university clinic and was told I had a mild case of pneumonia. After a week of useless medications, my breathing troubles increased. Finally X-rays were taken, and at the age of 18, I was diagnosed with Hodgkins disease, a form of cancer. There is no news that can be more devastating to a young person and his family. Perhaps the hardest thing I had to face was the loss of my physical prowess. Until that time, I was in exceptional shape, working out every day and participating in lots of sports. Over the next year, I was hospitalized and had to undergo chemotherapy treatments and radiation therapy. Throughout this dark time, I continued my studies at a community college. At this point, I realized that life was too short to waste time, and that I needed to work as hard as I could to achieve everything I wanted to do. As my resolve to succeed took flight, I coined the phrase, Out of adversity comes inspiration. I slowly recovered and went on to attend New York University, graduating with honors with a bachelors degree in accounting. I subsequently earned my CPA license and joined a large accounting firm. However, after spending several years in public accounting, I once again felt disillusioned. I needed something more. I applied and, to my surprise, was accepted at Harvard Business School. After two grueling years (but something I would do again without hesitation), I graduated. Here I was, a bright and energetic young man with an MBA from the finest business school in the world with countless job offers others would never dream of turning down. But somehow I just couldnt get excited about any of the positions, no matter what they paid me. I had already traveled down that road and knew that it led to a dead end. Instead, I decided to go into business for myself. Driven by my need for a more rewarding career, I started my first business. It failed. Strike one. Undaunted, I started a second business, which never even got off the ground. Strike two. On my third attemptan attempt to strike gold in the real estate businessI realized that I could actually be good at something. Working with some wealthy individuals in Massachusetts, I was just able to keep my head above water. I would find great real estate deals and they would put up the money to buy them. Subsequently, I would get a small piece of each deal. Unfortunately, I forgot one thing: I needed to eat and pay the rent without the benefit of a consistent salary. Finally, the day came when my landlord (one of my partners) came to collect my rent and I had no money to pay it. I hedged as best I could and asked him to give me a little more time. He turned me down, adding that he was going to throw me out regardless of how much money I made him in the past. I was shocked. At first I thought he was kidding around. But with a stern look on his face, he proved me wrong, stating unequivocally, One day you will thank me for teaching you this lesson. At the time, I cockily replied that Id be much happier with a wheelbarrow full of money. In hindsight, I realize that he was probably referring to my favorite personal proverb about finding inspiration in adversity. However, he is still waiting for me to thank him. Crushed and downhearted, I went to my parents to borrow money to eat and live. Being a Harvard MBA and having to borrow money from your parents is very demoralizing. Having to listen to Why dont you get a real job? not only from them but from others made me decide to give corporate life another shot. Soon after, I found a consulting job that lasted a whole 30 days. It was supposed to be a permanent job. But as I was being fired, I was told I had the wrong attitude. In fact, they said much more than that, but most of it could never be printed. Unfortunately, they were right. I did have the wrong attitude. I just didnt want to work for anyone but myself. I returned to real estate and started looking for new projects, but this time I was determined to control them. In this roundabout way, I was first introduced to the concept of an option. A real estate option allowed me to control a piece of property with very little cash for a specific period of time. As I later learned, stock and futures options are very similar. My first deal was exciting. I found a great apartment complex going into foreclosure and convinced the owner I could buy the property. In fact, I had no cash at all. Even worse, my credit was destroyed and my shiny BMW had been repossessed. Since I was approximately $50,000 in debt, I did what I had to do: I convinced an investor to put up the option money and split the profits after the property was sold. I made a nice $35,000 profit on that dealfinally, a success. After a series of profitable deals, the bottom fell out of the real estate market. There was no money available anywhere. Once again, I was left with a big question mark as to what I should be doing with my life. Luckily, serendipity intervened. One day, I received a small advertisement in the mail for a book on futures trading. Although I had no clue as to what futures trading was all about, I ordered the book. What struck me most were tales about making large amounts of money in a short period of time using very little cash. This sounded very similar to what I had been doing with real estate. Why had I never learned any of this when I attended Harvard Business School? How could the great boot camp of capitalism neglect to teach me about futures markets? My interest was now piqued. I picked up a few more books. I began to watch the markets. I even played with a few introductory strategies; but although I found them interesting, they were not very profitable. My first big mistake was to convince my investment partners that we should begin trading by hiring experienced professionals. In less than 30 days, these so-called professionals lost about 30 percent of our capital. This was an extremely poor way to inspire confidence in my investors. I decided to fire everyone and learn to do it myself. I knew that I could lose at least 30 percent without even trying (even more if I really tried). I was determined to make a profit, and the trick was to get a competitive edge. That much I did learn at Harvard. To be successful, you need to have an edge. I began to analyze where I could find this edge, focusing my attention on using computers to garner information faster than others did. I gained experience as a trader, even learning how to write my own computer programs. Eventually, this long and eventful journey gave birth to Optionetics. Today, I teach this system to individuals all over the world. Hopefully, this book will enable you to develop a better understanding of the markets and will assist you in learning how to profitably trade. In my opinion, there is no better lifestyle than that of a successful trader. Options are one of the most profitable tools available to traders today. They offer traders the ability to leverage positions, manage risk, and enhance returns on existing portfolios. To those who choose to trade options, this book provides the practical knowledge from basic concepts to sophisticated techniquesnecessary for successful options trading. It is designed to provide novice and intermediate traders with methods and strategies that will enhance profits and manage risk more effectively. The investment world has gone through amazing gyrations since the first edition of The Options Course was released back in 1998. We have lived through the boom of the Internet along with the subsequent bust when the dot-com became the dot-bomb. During this period, fortunes were made and lost virtually overnight. Traders who made money so fast they didnt know what to do with it turned around and lost it so fast it made their heads spin. It is always painful to see how fast investors can lose moneyespecially when techniques to limit risk could easily have been employed. In addition to this wild time in early 2000, we saw a precipitous decline in the technology sector as well as in many blue-chip stocks. In the years following the collapse of the Internet bubble, almost everyone lost money. Even people with mutual funds saw tremendous drops in their monthly statements. Meanwhile, many small as well as institutional investors kept betting that the market would rebound, only to see it fall again and again. This continual drain destroyed the confidence of many stock market players. Conversely, bond investors saw their yields rise dramatically as the Federal Reserve had to keep dropping interest rates. Apparently, the economic slowdown would not halt unless dramatic reductions in interest rates could spur economic recovery. It was a slow process and the American economy continues to slowly recover. World events have also changed our lives dramatically. September 11, 2001, was one of the most horrific and unforgettable events in the history of humankind. Unfortunately, too many mothers, daughters, fathers, and sons as well as all the heroes of 9/11 will be remembered in history due to the horrible deeds of a few. As someone who was in New York and saw this event firsthand, I will never forget this day for the rest of my life. This eventalong with surviving Hodgkins disease when I was only 18has led me to understand the importance of living life to its fullest every day. Undoubtedly it has woken us all up; we are now more fully aware of the global scope of the world we live in and the importance of appreciating the gift of life on this amazing planet. As options traders, we have to focus on the many events that can make markets move in any one of three directions: up, down, or sideways. One of the most vital factors that must become part of your daily market approach is to pay close attention to volatility. How fast can an event drive the markets, and how can we take advantage of this event? What strategies can be employed when historical and implied volatility diverge? Options provide the knowledgeable investor or trader opportunities to create scenarios that others may not see. A stock investor can only buy or sell a stock, whereas an options trader can have a number of different strategies for different time frames. I like to say that we are playing a chess game with the markets. The market makes a move; I counter that move until, hopefully, I checkmate the market. During the past 10 years of teaching individuals how to make money in the markets, I have had the opportunity to meet thousands of people, and they each seek ways to improve their livesboth for themselves and for their families. I hope that your own personal success will enable you to help your loved ones. Just remember that life is short and there are many roads it may take; but if we do our best to be good to others, then any path we take should also reward us many times over. I certainly hope this book will help you to change your life in a positive way. The powerful strategies reviewed in it offer traders the ability to consistently make good returns when these trading approaches are solidly understood and strategically applied. Although at times it may seem like an insurmountable task to comprehend all aspects of options, I promise that it is well worth the effort. Just think back at how much time and money you spent in getting to where you are today. A little more consistent time and effort can reward you many times over. The first question you need to ask yourself is: Why do you want to trade? The most common answer is to make more money. While trading can provide a great living, its important to make sure you love what you dono matter what it is. This will lead you to become more successful in the field of your choice. Once you have asked yourself why you want to trade, then ask yourself why you want to trade options. Most individuals want to trade options because these incredibly flexible instruments enable traders to control an asset for less money. For example, lets say I want to buy your house from you one year from today. I am willing to pay you the appraised value today plus another 10 percent on top of that. (If you dont take 10 percent, maybe I offer 15 percent or 25 percent.) Once you agree on the price and I pay you a deposit (known as the premium), I will have an option contract to purchase an asset (your house) at an agreed-to time (one year from today) at an agreed-to price. For this I pay you a premium. This is a simple example of a call option. The buyer (me) will have a right to buy the asset (your house) from the seller of the option (you), who will have an obligation to deliver the option (sell the house) to the option buyer. If you want the right to sell an asset, you can employ the use of a put option. A good analogy can be the purchase of auto insurance, which provides the right to sell your car (the asset) to the seller of the put (the insurance company) if the value goes down due to an accident. Lets say you purchase a policy that values your car at $25,000 and you pay $1,000 for one years coverage. What you have done is purchased the right to sell your car (the asset) for $25,000 for a one-year period in exchange for the premium of $1,000. If nothing happens in the year, your option will expire worthless and you will have to buy another put option (next years insurance policy). These relatively simple analogies are the initial steps to managing trading risk and leveraging your capital more effectively. In this book, you can learn how to use these amazing trading instruments in the volatile markets of the twenty-first century. I have been fortunate to work with some of this countrys best traders. This has enabled me to pass on an abundance of knowledge geared to help people become successful traders. This information comes from years of experience spanning from my first days as a novice trader through my experience running a floor trading operation at the American Stock Exchange and in the Chicago futures pits. It is my sincere hope that you can learn to develop moneymaking trading acumen by reading this book. Most importantly, you will be able to avoid many of the costly errors commonly made in trading and investing and ascend your own learning curve in leaps and bounds. I have confidence that you will gain significant insight into the world of investing by studying the strategies in this book. By applying this knowledge to stocks, futures, and options markets, I have no doubt that you will find trading a lucrative endeavor. |
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