Is it possible to make a modest living w/options?

Discussion in 'Options' started by wartrace, Mar 12, 2009.

  1. wartrace


    I have been studying options for quite some time but have not attempted any trading. I felt it would be better to become debt free before I did any speculating/trading. I have now reached that goal of having a paid off home, no other debt & very reasonable fixed monthly costs.

    I have been given an opportunity (pink slip) to try trading. I will be eligible for two years of unemployment due to the circumstances of my unemployment (Nafta-taa program). I have run the budget numbers & can live on the unemployment checks. I am also going to have a severance package that should provide me with 15,000 dollars to start with. I also have other assets I can liquidate that would bring that total starting capital to 50,000 in risk capital. I know it isn't a lot of capital but that is what I will have.

    I am particularly interested in writing credit spreads. I believe it to be a fairly conservative strategy with limited risk. I realize I will need to fail a few times for the sake of experience so I am now using a paper trading account to test the theory.

    Is it possible after two years of trading to be in a position to pull a couple of thousand a month from an options account if you started with 50,000 and reinvested any profits for that time? Is this worth trying? Am I just wasting my time?

    Any input would be appreciated. I have a thick skin so don't sugar coat it.:)
  2. Yes, but......
    1) Ideally, you start out when the market "accomodates" your strategy so that you can earn some money and learn the things you need to learn only as a result of trading real money and experiencing real emotions. Then you'll become confident enough to believe that you can continue making money and make adjustments to your system as the market environment changes.
    2) Have other sources of earned income while you are "trading". :cool:

  3. 1) 50K is plenty for the strategy you want to use. In fact, you should not consider using that much any time soon.

    2) 4% per month is possible. But not likely- especially for an options rookie.

    3) You do not have to incur losses to begin. Again, you may, but it does not always happen. Get yourself some experience by paper trading with a brokerage account. They should charge you ZERO to paper trade.

    4) Choose a broker that suits your needs. Some have very low commissions. Others have fantastic risk graphs (a bit too sophisticated for you right now, but you will want to lean to use them as part of your education).

    5) Do not choose a full service broker. DO NOT ask your broker for trading advice. Most know nothing useful about trading options.

    6) Learn by reading. Free web sites offer some useful material. Have a bit of patience and don't rush into trading.

    7) Credit spreads and iron condors is a perfectly good strategy. But you must be aware of risk and not trading too much size (too many contracts for your experience and pocketbook). Trade 10-lots in your paper trading account to see if that is too many for you, or if it feels about right. Do not be afraid to begin with one or 2-lots when using real money.

    8) You are going to get conflicting advice. Some will tell you to open the position then ignore it. I say that method is just plain wrong.

    a) When the remaining profit is relatively small, buy back the spread and keep the profits. No need to make the last nickel or two.

    b) Don't sell spreads for tiny amounts. No 5-point (distance between the strike proices of the options you buy and sell) spreads for 20 cents. Just a bad idea.

    c) Find your comfort zone. When risk is too great, don't be afraid to adjust (or close) the position. Taking losses is part of the game. you will not make money every trade, nor every month.

    9) Choose iron condors (put spread and call spread) is you have no opinion on market direction.

    10) Most prefer to trade near-term options. That's ok, but you must recognize they have the highest rate of time decay (good) but they also have the most negative gamma. For now, what that means is that when the position moves against you, those near-term options move the fastest and you lose the most.

    Keep asking questions. You are NOT wasting your time. But know this. Trading is not for everyone. It takes some skills and discipline. If you are too emotional, that could be a problem.

  4. wartrace


    I will be getting unemployment for two years which will cover all my expenses, if need be I could find a second shift job after that to survive.

    I am so thankful that I put every penny into paying off the house, it is a real blessing to not have the pressure of a huge mortgage note to meet every month. The majority of my co-workers are in a panic with the closure announcement- no way will unemployment (1200/mo) cover even that bill let alone anything else.
  5. wartrace


    Thanks for the advice Dagnyt, I have been studying options for the past two years & have been doing a LOT of reading. I am only emotional about my dogs & cats (when they pass away), money doesn't really get me all misty eyed.

    I have learned a lot from the books as far as position sizing & the negative effects of greed/fear. I am really looking forward to trying options trading. I am actually thankful for being laid off because the job really wasn't anything to me but a paycheck. I disliked the work but they payed just well enough not to leave. Sometimes it is a good thing to get a kick in the rear end.

    I am looking forward to reading the link you provided in your post, is that your blog?
  6. In the post it's a link to the OIC - Options Industry Council.

    Beneath my name is a link to my blog.

    And I truly get the dogs and cats thing.

  7. YOu need to be mindful, there are no guaranteeed profits from options. You may do this while thing, and wind up losing as much money as you expected to make. In fact, that is the more likely outcome, since you also have builtin expenses and risks that make trading negative expectancy game.

    If it is easy, there are many institutions with billion dollar research budgets, who will outcompete you in every way.
  8. wartrace


    I wish there WERE guaranteed profits but if that were true everyone would be doing it, right? I am only going to proceed IF my paper trading is profitable. I am going to use limited risk strategies and not risk more than 3 to 5% per position.

    I am well aware of the risks involved, I am not going to go long on anything & will be able to monitor the positions throughout the day and hopefully get out of bad trades without losing it all.
  9. The wide bid/ask spreads in most options make it difficult to simply decide to exit a ;position at no loss. And don't ignore commissions.

    If you choose an index and (for example) sell a 10-point spread that's OTM by 60 points, it's crucial not to panic and head for the exits when the index moves 10 points.

    However, it's also vital that you do not close your eyes and allow the spread to move to its maximum value.

  10. I'll go ahead and throw in my 2 cents, but in reality it's only worth half that :)

    1. You mention that you might get $15K, but might be able to make it up to $50K if you sell something or whatever - you have to decide it it's worth you selling or if you want to keep whatever other asset that is.

    2. If you have $50K to start with, I would put away a large portion of that to not touch with trading, even if you start making money. If you started with $20K for example, if you did good, you would eventually build up anyways. If you ended up losing alot of it, you'd still have money for other stuff.

    3. Related to number 2 - people like Suzy Orman always say you need 6 months emergency funds - since your house is paid off, you probably don't nee as much as some people would, but remember things like property taxes, insurance, heating/cooling, etc. - plus large things that can break down like furnaces. Plus, if you get to where you are no longer collecting unemployment or anything, you need 6-12 months past that point IMO.

    4. If I were you, I would consider taking about 2-3 months where I would not trade at all except for paper trading. Also, spend time learning the market and options, and learning about risk management. During these months, not only will you learn alot, but you can make sure you can pay your bills, etc. ok without having the strain of having some of the money tied up in an options position. Especially when it comes to options, you should never be afraid that if you don't trade now, you might miss a great opportunity - there are always ways to make money with options in any market.

    One more quick thing related to that last item - you don't want to get caught in a situation where you think a trade will be good, but you need the money so you close it out for a loss and then use the money, and then it turns out the trade would have worked. In other words, money that ends up in your brokerage/options account you cannot rely on for bills - in an extreme emergency you can of course access it, but that can cost you big time.

    I wish you luck.

    #10     Mar 12, 2009