No-Hype Options Trading

05/06/2011 4:44 pm EST

Focus: OPTIONS

Kerry Given, PhD

Founder and Managing Director, Parkwood Capital LLC

Stories about option traders earning exponential profits right away are common, but trader and author Kerry Given dispels the myths and talks about what it really takes to be successful.

Joining me in the MoneyShow.com video network studio is trader and author Dr. Kerry Given. You’ve written a book; tell me about it.

Yes, it’s called No-Hype Options Trading and I chose the title simply because there is so much hype in the options trading business. 

You can go to the Internet any day and find people bragging about making 78% in two hours or something like that, and so I was trying to dispel some of those myths.

Well, what are some of the myths?

Well, there are several, but for example, one of the common ones is to say that a particular strategy is the best strategy. 

A lot of people seem to be searching for the “Holy Grail,” and there are a lot of people, unfortunately, who are selling the “Holy Grail,” and so that’s one of them. 

Basically, all strategies have their pros and cons, and one strategy may be appropriate for a particular market condition, but no strategy is good all the time.   

How about the personality of the trader? Does that come into play when picking a strategy?

Absolutely. When I’m coaching students, I try and ascertain what is their risk profile and what are they comfortable with, and I also counsel my students to try different strategies and find the one that seems to intuitively fit them; one that they’re comfortable with because they will trade that better. 

How do they go about that? The learning process seems like it’s a long curve.

It is a long curve, and that’s one of the things that I think some people have unrealistic expectations about. 

In order to learn how to trade options, you really have to learn the basics, and then you have to practice the trading, and even when you start trading live with real money, you need to do it at small, small quantities, because it takes time to gain the experience.

I would say the learning curve is probably somewhere between six to 18 months before you really get comfortable.

And then you still have to look at losing, so how do you manage the risk of losing?

Risk management is one of the most important things to learn in this business, and I try and teach my students for every strategy, how are you going to manage the risk for this particular trade?

Sometimes I may involve something as simple as just a stop loss; when it hits this level, I’m getting out. Other times, you may have adjustments that you may be able to make to minimize your losses and buy a little time.

So you need to understand what is the risk management system for this trade at the beginning of the trade and not get halfway in it and ask “What am I going to do now?” 

What’s the one piece of advice you would give to those who are looking to start learning about options trading?

I would say you need to get a solid foundation of the knowledge, of understanding how options behave, how they’re priced, how they change with the prices, and then applied volatility and so forth.

But then beyond that, you need to be sure that you practice and gain experience without risking a lot of money, so you need to trade small and have someone to mentor you as you go through that process.

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