The Financial 'Killing Field'

John Summa Countless would-be stock and options traders enter the market each day with an almost messianic desire to make money trading -- only to exit in defeat, with large capital losses. For those who survive and become successful at trading, it usually is necessary to pass through three stages:

1st Stage: Greed
2nd Stage: Fear
3rd Stage: Successful Risk Management & Consistent Profits

It is only at the third stage when profits become systematic and losses minimized. You may be in the greed stage currently, or perhaps you are already in the fear stage. If you are lucky or skillful, or have a combination of both, you may have passed right to the stage of successful risk management and consistent profits.

The bottom line is that no one can successfully trade if his or her emotions are swayed by greed or fear. It is no understatement to say that emotional decisions are a trader's worst enemies. It is only after establishing a set of rules that you know are sound (especially well defined risk-reward parameters) when fear and greed can be controlled and profit making made more consistent.

Often the quest associated with the greed stage is associated with the idea of "trading for a living" and finally liberating oneself from the proverbial "rat race." Ironically, many ultimately find a stable job comforting after the frenzied up- and-down moods of the madness associated with betting in the stock, futures or options markets. The "hoping" (praying might be a more apt term) syndrome -- wanting a market to move in a favorable direction -- is finally cured with a retreat to the office job (usually at some considerable relief), with shattered dreams, broken egos and too often an empty bank account.

These are the hard facts of life of trading in capitalist markets, too often down-played by the a new breed of online discount brokers and self-interested vendors of trading services (i.e., expensive data feeds and trading software) of one kind or another. Most care little about you, meaning about whether you win or lose,
probably as little as the markets do.

When you burn a hole big enough in your pocket, they know there will be another newbie wannabe trader ready to fill the vacancy left by the last trader’s blown-up account.

It is this reality -- a relentless financial killing field-- that keeps the real pros in business, since by definition with losers you have winners. Since options markets -- my favorite markets to trade -- like most financial markets, is a zero sum game, with every winner there must be a loser, a regular slaughter of the lambs is a prerequisite for others to survive. And the winners are usually the big guys (the "smart money") with plenty of capital and experience to weather any storm; the losers, the "dumb money," the members of the "crowd," (the average investor) are often undercapitalized and inexperienced.

In the options markest, the crowd is usually found playing the "long" side (i.e., leveraging their smaller capital bases with the purchase of puts and calls). Put and call options trading data and expiration patterns reveal that they are consistent losers. As you will see, though, it is possible to play the market without purchasing a single option--employing an option selling strategy used successfully by large professional money managers who have proven track records. I will discuss this approach in subsequent articles.

Meanwhile, if you are new to options trading, or trading in general, the old saying that 'haste makes waste' applies painfully here. Some words of advice: Take a step back and study the markets carefully before putting your hard earned money at risk.

In my next installment, I will show you why I believe options traders should explore limited risk strategies that take advance what is known as time premium decay. You'll need tol learn some of the basic option concepts, so I will help you along with the essentials, as well.

That said, stay tuned for some good news about potential winning approaches in the trading game that can hopefully keep you out of the financial killing field.

Cheers!

John Summa, CTA, CPO, PhD, ABD
John F. Summa is Founder and President of OptionsNerd.com (http://www.optionsnerd.com), and a registered Commodity Trading Advisor (CTA) with the National Futures Association (NFA). Founded in 1998, OptionsNerd.com offers trading seminars and tutorials to options traders, futures and option trading advisories and managed futures and options CTA account services. Mr Summa's trading articles have appeared in Technical Analysis of Stocks & Commodities magazine, as well as Active Trader Magazine, Options Trader Magazine, Futures Magazine, Stock, Futures & Options Magazine, TradingMarkets.com and Investopedia.com. He coauthored Options on Futures: New Trading Strategies and Options on Futures Workbook (John Wiley & Sons, 2001) and more recently wrote the groundbreaking book, Trading Against The Crowd: Profiting From Fear and Greed in Stock, Futures and Options Markets (John Wiley & Sons, 2004), which includes Mr. Summa's innovative quantitative bear and bull news-flow contrarian indicator. Mr. Summa is a PhD-trained economist and money manager.