Can I really make a living trading options? -- or am I just lucky so far?

Posted by Paul McGhee on October 06, 2011 (12:39PM)

I've spent the past three years practicing for quitting my regular job and "retiring" to support myself as a retail options trader.

I've been able to generate enough returns to replace my income by running the typical income trading strategies (credit spreads, diagonals, calendar spreads, an occasional butterfly) in a cash account. I try to make about 3-4% of risk every month. Some months I make less, but I've only had one losing month so far this year and it wasn't particularly bad.

I'll typically have 80-90% of my cash at risk.

I learned everything I know from Brian, Paul Wolfinger, Dan Sheridan, Nichole, and professor Natenburg,

I've had some bad moments -- like the time early on when I found out that the A.M. settlement values for the SPX index options come from lala land instead of from the index itself, and the flash crash created a pretty horrible month for me.

But I recovered, and later I got though the tsunami with flying colors, and the European debt crises with the inflated implied volatilities that it created has given me a spectacular year so far.

I've left at least $50k on the table in the past three years by adjusting spreads that didn't ultimately need adjustment, keeping with a risk management approach that has kept me away from disasters, at least so far. I probably adjust spreads -- for risk -- 10 times for every one time that the adjustment actually averts disaster on settlement day.

But is all this just luck? Does anyone else do this? For a living? For a long time?

Posted by doougle on October 06, 2011 (01:41PM)

I could have written this post myself.  I too strive to become financially independent through money management (Options, stocks, bonds, ...).  I find that I'm encouraged by good months and discouraged by the bad.  I keep trying anyway.

My poker playing friend says in order to make a living at poker, you have to have enough of a bankroll to withstand some bad times.  I'm guessing the same applies to any risky venture.

Like you, I've spent a ton of time educating myself.  I feel that I have a better than average grasp on the mechanics of options, but will spend forever learning the practical application.  I apply good option strategies to bad trades. (when I'm wrong)

I'm a free-lance audio engineer.  I have a hand full of good clients that don't take up all of my time.  So I can dial the trading up and audio down at my chosen pace.  Right now I'm at 80% audio and 20% trading.

Posted by Carlton Banks on October 06, 2011 (02:48PM)

I have similar goals as you and doougle but I don't plan on having a majority of my income coming in through my investments.  The goal is to supplement my current income.  But, that's several years down the line from now.

Posted by spshapiro on October 06, 2011 (02:51PM)

For some people it is a problem when their living depends on their trading.  You have to learn to  separate your investment judgment from your need to make $XXXX a month/year, or you will make what is technically known as “Stupid trades”. 

Posted by NYSEguy on October 06, 2011 (08:21PM)


Paul McGhee said:

But is all this just luck?

 
At what point does luck become skill?

If you've stayed in the game for three years, you probably know what you're doing.  The teachers you mentioned are all extremely knowledgeable-- Mark Wolfinger has also helped me immensely-- but a good portion of what you know has come from experience.  Losses are never pleasant, but if you learn from them, you'll have turned them into gains.

Best wishes for your continued success!

Posted by guitarmanken on October 06, 2011 (10:56PM)

      Looks like I might want to learn more about this Wolfinger guy! Does he have a book?

Posted by NYSEguy on October 06, 2011 (11:29PM)

Ken,

Mark Wolfinger is a former CBOE market maker, and an "All-Star" contributor here at TK; check out his blog posts and videos.  The posts from his now-defunct Options for Rookies free blog are still available here.  His most recent book is The Rookie's Guide to Options.

Posted by guitarmanken on October 07, 2011 (01:36AM)

NYSEguy said: Ken,

Mark Wolfinger is a former CBOE market maker, and an "All-Star" contributor here at TK; check out his blog posts and videos.  The posts from his now-defunct Options for Rookies free blog are still available here.  His most recent book is The Rookie's Guide to Options.

     Thank you brother!

Posted by Paul McGhee on October 07, 2011 (09:30AM)

quoting spshapiro

"For some people it is a problem when their living depends on their trading"

I have heard the same thing said about poker players... some of these tournament guys are much less successful at old-fashioned cash poker because they can't play effectively with their own money.

It's a concern for me, too.

Posted by Paul McGhee on October 07, 2011 (10:03AM)


I didn't learn anything spectacular from Mark Wolfinger, but he is in my mind nearly every day.

Paraphrasing, he says, "There's no such thing as an adjustment. It's a loss. Take it and move on to the next trade."

He also mentions from time to time that he once was completely wiped out, and is fortunate to have been able to eventually refinance himself and continue trading.

Looking back he feels he took too much risk. I think about that a lot.

Posted by OldFart on October 07, 2011 (12:06PM)

I respectfully disagree with Mr Wolfinger (well, it will not be the first time). First thing first - in my mind adjustments should be considered not only when there is a loss but when there is a profit

Posted by Paul McGhee on October 07, 2011 (12:20PM)


Maybe I misquoted him.

On the face of it, it's indisputable. You're closing a trade at a loss (OK, or a profit). Then you are making another trade.

That's how I record it in my trading notebook: one trade closed and another one opened. Works for me, maybe not for everyone else.

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