by Jerry Lee
Even though ninety percent of people lose money with options, they can be part of anyone’s portfolio if a person takes the time to learn how to use them correctly. Instead, the author writes a general statement that you are going to lose money with options. This type of writing contributes to the mystique and ignorance of options. The author could have saved 999 pages of the book and just told the readers to put all their money in a money market, get 3% annual interest, and sleep well.
Using Options
Everybody wants to make a lot of money and everybody wants to make it fast. Options might help you do both of those things, but if those are your driving forces, the odds are you will lose on both of your goals. Options are a viable financial tool for people who are proactive and want to be involved in the monetary decisions that affect their future. You must decide if you have the time and inclination to monitor your account daily. If you are a mutual fund type of person who wants to buy, hold, and check the account once a year, then options are not for you.
I have several retired friends who lost a lot of their retirement nest egg with WorldCom, Enron, and other “super stocks.” Respected financial advisors who had supposedly done the homework for them had advised these people to invest in these companies. Many of these “experts” had to pass on the sad news to the families that they were not going to retire as well as they had thought. So much for “experts” managing your account.
The point is that all investments can be dangerous. All investments can cost you your nest egg. The few rules and guidelines that I have presented, and those that you might add, should allow you to make some good decisions and give you guidance to prevent disasters.
Many of you who read this book might think that there are lots of new terms and scary words in this information. I am sure much of this is new to many of you. However, by following my few rules, you should be able to paper trade until you feel prepared and confident.
Options trading compared to real estate
Early in the book, I mentioned that I had done some investing in real estate, especially with rentals. I have seen many advertisements on television for seminars regarding how to “flip” houses, how to buy with no money down and several other can’t miss ideas. If I compare real estate investing to option investing, my advice is to do options. I have done both and although I made money with real estate, I had to work very hard for it. My partners and I were always repairing toilets or cleaning up after the renters had moved out. We put new roofs on two of the three buildings. We also spent time painting and showing the units, going through applications, and making credit inquires. We spent time trying to settle disputes about noise, pets, and other problems. Then there were the renters who did things like move out in the night and leave faucets running. Oh yeah, that rental business was a fun time!
Doing options, I spend an hour or so on most days and then I go golfing or enjoy other hobbies. I do not get bounced checks from my brokerage. I also do not receive phone calls from my broker complaining of the barking dog next door. I know brokers can be an unruly bunch but so far, none of them have come to my house in the middle of the night and left a faucet running.
CHAPTER 24
STOCK AND OPTION NEWSLETTERS
Because of web sites I have visited, I constantly receive stock-oriented newsletters. Some come over the Internet and some come via the U.S. Postal Service. Over the years, I have found myself on several mailing lists and continually get letters telling me that for a small sum, they will tell me about the next “wonder stock” or the very best “option play” that has ever presented itself.
People, please do not fall for these. They are slick and persuasive with pictures and graphs about the price of gold, oil, and global warming, etc. If you believe for a minute that anyone who knows the next great super stock really wants to share that information with you, you need help. They promise, phone lines with 1-800 numbers, email, and maybe even carrier pigeons. To me, this is the equivalent of selling you the Brooklyn Bridge. Always remember that if they knew a good stock, they would use it, not share it! You will receive many advertisements regarding this type of investment. Believe me; they are good at promoting themselves. Everybody wants an edge, and these people are very good at promising you that edge.
Please put these offers in the shredder and smile. If they happen to come in a roll, and the paper is very soft, you might have other and better uses for them.
Seminars and other educational tools
During my ten years of trading options, I have received many invitations to various seminars. I have attended several of these with the idea that what I would learn could only help me with my trading. Looking back on these classes, I am sure that I did learn some things and usually enjoyed the experience. Each of these had a “product” that they were selling. Some had software for your computer others had a newsletter they were pushing. Some of these had a free ‘first day’ but for the really good information, you would have to pay for the second day.
If you attend any of these you must be prepared to be tempted to buy the product. These classes are presented as though the information will make you the Super Trader. They are trying to make you think that you cannot do without their information. Again, you must keep in mind, if their information is so good why don’t they just use it themselves?
CHAPTER 25
SUMMARY
The objective of this book is to expose you to another kind of investing. Please do not discount the full potential of option trading until you have researched the possibilities thoroughly. You might find that not all of my ideas fit with your style of investing. You also might find that my ideas work, but you will tweak them a little to fit your personal style of investing. One of the main points that I want you to understand is that there are many ways to trade options. All you need is some knowledge and guidelines. While investing with options, do not shoot from the hip. Have a plan and follow it. If you find yourself with more losing positions than reasonable, check to see what part of your trading style is failing. Remember, there are thousands upon thousands of people who trade options daily and make a good living. The winners make their money by using a plan and following their personal rules. Options may seem exotic, confusing, or just plain scary, but once you get the hang of it, they can be a fantastic and fun way to pick up some “free money.”
Here is a review of the basic rules for the crumb method.
Do not get greedy
Use mostly stocks in the $50 to $500 range
Use a strike price 20% or more below the current stock price
Make sure no major news is coming (earnings, splits, dividends etc.)
A good history during this period
Use stocks that have a ”buy” recommendation
Use stocks with a reasonable PE
Use stocks that are trending up or holding steady
Do not use your entire maintenance. Leave some room for hiccups
Do not let your losses run away from you
Never hesitate to take profits or losses if there are any doubts regarding the position
Be suspicious of premiums that are “too good.”
The rules and filters that I have shared with you have been learned after many thousands of option trades. They are simple and straightforward, and I hope that they help you on your journey.
I want to wish you the best of luck and good trading with my crumb method.
