- Too Good to Be True
- Introduction to Trading
- How Options Work
- The Horse Race
- Buying Versus Selling
This chapter is from the book
This chapter is from the book
This chapter is from the book
Introduction to Trading
Ironically, with condor trading, having an opinion about a company or the direction of the market is the easiest way to lose money. The more convinced you are that your opinion is correct, the more you'll hold onto a losing position and ignore the realities, not of the company but of your trade. A wise investor named Bernard Baruch once said that the main purpose of the stock market is to make fools of as many people as possible. The best response to this advice is to not have an opinion.
There are very few places where not having an opinion is actually profitable, and surprisingly the options world is one of those places. Some options strategies are "market neutral," meaning their potential to generate a profit is not dependent on whether the market goes up or down. Actually, these market-neutral strategies do best when the market moves up and down within a given timeframe.
Once upon a time, a myth was perpetuated that all you had to do was keep your money in the stock market and you would get rich and retire. This assumption was considered so obvious that something called an "Individual Retirement Account," or IRA, was created so that people could put their money in the stock market and benefit from tax incentives. The fundamental problem with this way of thinking is that people forgot that the stock market is a place of investment with all of its associated risks and dangers. It is not a retirement account. After the 2008–09 crash in the market, most people are now painfully aware of this fact. The buy-and-hold strategy is not guaranteed to create wealth.
Investing also presents you with a huge obstacle, namely, acquiring and applying knowledge. Do you really know more than the stock market? If Apple is priced at $200, you need to know something that nobody else knows in order to believe that the market has mispriced Apple and that the company should be worth either much more or much less. Actually convincing yourself that you have an edge against full-time professionals with their massive supercomputers and their team of Ph.D. programmers is delusional. Chances are if you do make money investing in the market, you are likely riding the wave that is making everybody else money as well—in other words, you got lucky!
There is another way to make money in the stock market that has nothing whatsoever to do with investing: trading. Investing requires, or at least should require, research, understanding, careful analysis, and strategy regarding a company and its sector. Trading is simply about making money. The shorter the timeframe involved in the trade, the less significant fundamental information and all the accompanying research becomes.
Swing traders like to trade in a timeframe of days or weeks. Day traders like to trade in a timeframe of hours or minutes or even seconds. Now computers are involved in high-frequency trading (HFT), which moves money in and out of positions in millionths of a second. Computers have taken any kind of qualitative edge away from human traders. They can process all relevant news and information and trade accordingly before the nerves in your eyes can electrically send the visual information of the words you just read to your brain.
There is one domain where computers will not drive out the human competition. That is the world of options trading. Options traders observe and rely on the market's emotions, fear, and panic, and design their moves to maximize or minimize the effects of time. Increased fear means increased prices in options, and decreased fear means lower prices. Although computers have been programmed to exploit mispriced options in an instant, fear is something computers don't understand...yet.