From $30,000 to Retired -- in 15 Years

In April 1987, inspired by how Eddie Murphy and Dan Aykroyd managed to turn the tables on the Duke brothers in the comedy Trading Places, John Henkel moved from Arizona to Chicago with $30,000 to begin his career in trading options.

Within six months, the market had crashed and John's stake was all but wiped out. But he persevered, stuck to his system, and was able to retire just 15 years later. He now spends most of his time taking very good care of my sister and my nieces and nephew.

The moral of this story could be "Win big like John," but it's not. To be clear, there is much about John worth emulating -- just not the options-investing strategy that made him wealthy.

Starting out
Beginning an options-trading career right before the crash of October 1987 was less than fortunate. He was on to something called "neutral spreading"; the particular technique he used involved buying or selling options to take advantage of situations in which the market misinterpreted the volatility associated with a stock.

The Black Monday crash took a tremendous toll. Many people forget (or are not old enough to remember) that the markets seized up in an even more dysfunctional way than we've seen over the past year. On Oct. 19, 1987, the Dow lost 22.6%, more than any other day in its history and far more than the 7.9% drop we just saw last Oct. 15. Dow components and heavily owned blue chips American Express (NYSE: AXP  ) , Goodyear Tire (NYSE: GT  ) , and Eastman Kodak (NYSE: EK  ) lost more than 29% on that single day!

Over his first two years, John burned through his $30,000. Today he refers to the initial stake as "tuition." He persisted. He found inspiration through the influence of some very successful experienced traders, who gave him confidence about his strategies. Crucially, he also found a backer to replenish his account.

Building wealth
Over the next 13 years, John profited tremendously by trading on volatility using neutral spreading. He made aggressive bets -- with no fear, because he had true belief in what he was doing.

It was hard work, to be sure. He describes feeling like he was in a six-hour football game keeping up with all of the information he needed to digest on the trading floor. He now also confesses to a momentary lapse wherein he was "paralyzed with fear" as he lost $750,000 on a position … yet somehow he still made money that week.

He'd found his own very legal advantage (unlike the Dukes in Trading Places, who used inside information) in identifying mispriced volatility premiums on the Chicago Board Options Exchange trading floor -- and he was consistently winning.

The writing on the wall
In 2002, John cashed in his chips and went home. Was he just tired? No way -- he loved what he was doing. But he saw the beginning of the end. His trading-floor advantage was about to disappear. He correctly figured that the combination of increasing computing horsepower and volumes of information immediately available through the Internet would increase option-trading liquidity and rationalize most of the irrationalities he was finding.

He understood that the advantage that had depended on illiquidity and the information only available on the floor of the CBOE was disappearing, and he got out. Today, anyone with Internet access can make low-cost options trades with any of the discount brokerages, including optionsXpress Holdings (Nasdaq: OXPS  ) , TD AMERITRADE (Nasdaq: AMTD  ) , Schwab (Nasdaq: SCHW  ) , Scottrade, E*Trade (Nasdaq: ETFC  ) , and ShareBuilder.

John still trades at home from time to time, but nowhere nearly as aggressively.

I feel bad that my brother-in-law is spending more of his time in carpools these days, but at least he has his wine collection. (OK, I'm over it. Really.)

The lesson
The moral of the story is something John said to me: "There was no longer an advantage to be on the CBOE floor versus your computer at home." As a professional without a "floor-trader advantage," he decided to get out of the game.

This is great news for individual investors! Whereas professionals like John used to have access to superior information and faster, less-costly trading, we now have those very same tools. In other words: The playing field has leveled.

But just because the playing field has leveled, that doesn't mean there isn't still money to be made -- if you're employing the right options strategy. And that's why you should check out our new -- and totally free -- exclusive, interactive educational video series on options, led by Jeff Fischer. Jeff's a smart long-term investor who believes that options can help most any investor earn better returns. To see for yourself, just put your email address in the box below for immediate access.

And thanks, John, for your inspiration. I hope many Fools get to trade places with you.

Motley Fool President Scott Schedler owns no shares of any company mentioned in this article. optionsXpress and Schwab are Motley Fool Stock Advisor recommendations. American Express is an Inside Value selection. The Fool owns shares of American Express and has a disclosure policy.


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  • Report this Comment On August 14, 2009, at 11:24 AM, ChannelDunlap wrote:

    "I feel bad that my brother-in-law is spending more of his time in carpools"

    This doesn't sound like retirement to me. Does sound like a fun time though.

  • Report this Comment On August 14, 2009, at 11:45 AM, henryking54 wrote:

    For the first 15 years of the Motley Fool's existence (1994-2008), options were considered gambling and a sure way to destroy wealth:

    http://www.fool.com/news/foth/2002/foth020104.htm

    Now, all of a sudden in 2009, you people recommend options trading? It makes no sense, other than you are desperate for new revenue streams and are trying to cash in on yet another newsletter concept.

    What a bunch of hypocrites.

  • Report this Comment On August 14, 2009, at 11:52 AM, kamuirei wrote:

    Yea, the old MF letters were great... *leaves the rest to inference*

  • Report this Comment On August 14, 2009, at 12:05 PM, henryking54 wrote:

    Did you read the link I provided on Bill Mann's article "Why We Avoid Options?" The Fool expressly told people repeatedly NOT to trade options. Here is an excerpt from Mann's article:

    "Let's examine why I believe individual investors are little more than the fodder for the options market. First of all, unlike equities, there is no wealth creation at all in options. As such, in any options trade, one of the two participants MUST be wrong.

    There is a fixed amount of value in options, and each one eventually expires. Actually, in options it is possible for both participants to lose, because neither may gain enough to cover broker commissions. Look at it this way: If there is a town where the only economic activity is for people to buy umbrellas from one another, eventually the whole town will in fact be broke. There is no way for options writing to generate value. Actually, it's a highly valuable line of business for the brokers -- they get to keep the vigorish on the options, leaving the options traders worse off collectively by several billion per year.

    That's the thing about options for most retail investors: It just makes something that is already so bloody complicated that much more so. We are already charged with the difficulty of determining what companies are good -- now we are trying to determine what the short- to medium-term price action will be as well, and to do so in a zero-sum game with a large and well-equipped group of professionals? Man, there is just no need. If you like a company and think the price is good, buy it. If the company seems expensive to you, sell it. Leave the casino games to the professionals, where game theory holds that in a field of players of equal ability, capital will eventually flow to the best capitalized. That, I dare say, is not you."

    http://www.fool.com/news/foth/2002/foth020104.htm?

    Here's another Fool article against options:

    "The truth is that most options expire unexercised and worthless. This is because options are really about buying time, not stocks. If you're really so sure that FishTop will rise -- and I'm skeptical that anyone can regularly predict the short-term moves of stocks -- just buy its stock, and leave options to the guy with the BMW. Chances are, he won't be driving it for long."

    http://www.fool.com/fribble/1999/fribble990210.htm

    And another:

    "As long-term investors, we don't place a lot of confidence in our abilities to predict price movements of a given stock over the next one to three months. We prefer to put our confidence in the wealth creation capabilities of outstanding businesses over a period of three to ten years. Therefore, it follows that using our investment capital to speculate (yes, that's the word for putting money in options) on price movements doesn't hold a lot of fascination for us."

    http://www.fool.com/portfolios/rulemaker/1999/rulemaker99111...

    And another:

    "The "official" Motley Fool position (as stated in the Motley Fool Investment Guide) on options is simple -- they are to be avoided, period. Why? Here are just a few reasons.

    1. Options generally have higher commission costs than stocks. Also, option commissions usually are more complicated to calculate than stock commissions.

    2. Options are very thinly traded (not many are traded every day), compared to stocks. Because of this, options have much higher spreads than stocks. The spread is the difference between the bid price (cost you could get on sale) and the ask price (cost you must pay to purchase). Stocks often have a spread that is less than 0.5%, while option spreads are frequently over 3%.

    3. Options expire within a limited time (less than 8-9 months normally, save for a certain type of options called LEAPS, which may not expire for up to 3 years).

    The three factors above run counter to the basic Foolish principles of long-term buy and hold and keeping trading costs at a minimum. Anyone who trades options will be giving a sizable chunk of money to brokers and will have to trade every six months or so (if not more).

    Most importantly:

    4. Options are very volatile. Thanks to leverage, an option's volatility will often be over four times that of the underlying stock (if a stock goes down about 10%, a "call" option might decline by about 40%. Remember the first week of the year? Multiply that by four!). As expiration approaches, that volatility will often become even greater. The options strategies discussed on the boards will frequently have 90% losses on individual positions, and often will lose 50% or more for the entire portfolio. Not "might lose," but "will lose."

    http://www.fool.com/workshop/2000/workshop000118.htm?

  • Report this Comment On August 14, 2009, at 1:18 PM, 181736065 wrote:

    I am interested in how TMF justifies changing it's course based on the above referenced negative views of options.

    In their newest newsletter offering on options.. THEY EVEN RECOMMEND THEM AS A "STANDALONE" INVESTMENT STRATEGY!

    Quote (after providing some amazing tantalizing examples of option gains) :

    "Motley Fool Options is both an ideal complement to existing Fool advisory services (turbo charging your holdings, as well as providing you a hedging capability)... OR the perfect standalone service -- positioning you for impressive gains.."

    Is this right? I am interested in seeing the new newsletter to understand why they now have seemingly switched course.

  • Report this Comment On August 14, 2009, at 1:21 PM, XMFCams wrote:

    Good point about how sticking to your strategy (whatever it might be) is the best way to invest.

    If you ask me, using options is one of several smart ways to build your wealth long term. Of course, some Fools past and present prefer to stick with common stocks. That's okay. We embrace different investing strategies here.

    I'm going to watch Jeff's video series when I get some time later this afternoon. Then I'll decide if his strategy is right for my personal investing.

  • Report this Comment On August 14, 2009, at 1:32 PM, XMFTheNew wrote:

    henyking54,

    Granted, the Fool used to think options was a bad idea. But how can you expect any organization in America to be paralyzed by sticking to an outdated opinion on investing? Especially during this market turmoil?

    Condemning the Fool for evolving and adapting to better fulfill its members needs is on the same level as digging through antiquated Supreme Court rulings and holding today’s justices accountable for them. Everyone changes and evolves.

    The Fool's new approach to options is levelheaded and well thought out and most of all – successful! Why should the Fool keep people from something that could help them right now?

    -TMFTheNew

  • Report this Comment On August 14, 2009, at 2:16 PM, BTShine wrote:

    I came to the Fool website to try to find walking canes for baby boomers, but unfortunately there isn't any information about walking canes on the fool.com website...awe shucks, maybe next time someone will show me where I can find some gosh darn walking canes.

  • Report this Comment On August 14, 2009, at 3:38 PM, girlsplaygeetar wrote:

    I've found options to be a good way to hedge my other investments.

  • Report this Comment On August 14, 2009, at 3:41 PM, TMFFischer wrote:

    Greetings,

    Seventy to 90% of the time, you'll want to write an option, rather than buy one, in my opinion. Doing this, you eliminate just about all the criticisms above ("options expire;" "you need the stock to move;" etc). Writing options, you generate a premium payment, or income, or yield -- however you want to call it -- time and again, and nearly all of the criticisms above turn into benefits for you. You love that options expire. You love that time works against them. You're happy if a stock goes nowhere. And so on.

    Meanwhile, when you buy options, you usually buy them using strategies that protect you on the downside (you know exactly the amount you're risking), and yet you don't limit your upside.

    Options are basic tools. If you know a business and its valuation, you can use its options to benefit from your knowledge. When you're writing options, much of the time it's a broker's market maker on the other side of the trade, simply paying you the premium (you're not taking someone else's lunch -- it's just another market transaction). Warren Buffett uses options and was not talking about stock options when he talked about the dangers of derivatives. In fact, in that famous article itself, he said that he uses stock options -- which are, he said, a very simple derivative -- but he was warning the world about complex credit default swaps and other brand new derivatives that were not regulated. Stock options have been around since the 1970s. He's used them for a long time.

    By now, the Fool has probably written more positive articles on options than not, but when it wrote negatively about options -- mostly in the 1990s -- it was probably accurate advice for the time. Back then, options were much more thinly traded and much more expensive to trade. You needed much more money to make it worthwhile. Things have changed. Now, they're nearly as inexpensive to use as a stock itself, and have much more trading volume in general.

    Eventually, people will wonder what all the fuss was about regarding options (why all the debate). They're basic yet effective tools to buy a stock cheaper, or sell a stock higher, or profit if a stock stays in a range, or participate in a stock's movement for lower upfront costs, among many other uses. You follow the golden rule of only investing your own money, not using margin, and you use options to complement, enhance and improve your stock portfolio. Options usually generate shorter-term gains, and this allows you to let your stocks be longer-term holdings with less worry and greater cash flow in your portfolio via the options.

    You do need to be a bit more involved as an investor who uses options, but if you enjoy stock investing, you'll enjoy options. Options offer many more strategies at your fingertips to make you a better stock investor. You can't separate the two.

    Best,

    Jeff

  • Report this Comment On August 14, 2009, at 3:52 PM, ravermagik wrote:

    Ever since they started their own mutual fund they have changed their style of writing. Now i believe they are only in it for the money.

  • Report this Comment On August 14, 2009, at 4:05 PM, multi007 wrote:

    I know nothing about options. I am an equity trader. Should I even consider options?

  • Report this Comment On August 14, 2009, at 4:09 PM, RaulChapin wrote:

    The Fool has changed from being a site with a simple and solid base to being a forum. The old Fool was a much better site for the average Joe, mainly because it was safe. The new Fool allows in its pages different points of view, which is better for the more experienced investor but which if taken without a LARGE grain of salt can be trouble for the less experienced one.

    I see options as a form of insurance. Insurance is a zero sum game... in which only the insurance company makes money, and all insured merely distribute the losses. Does this mean that Insurance is a thing to be away from and never touch? no.

    Similarly though, there is a fine line between educating in the need and uses of insurance and being and insurance salesman. The current marketing strategies are near the border of legal but unethical.

  • Report this Comment On August 14, 2009, at 4:43 PM, zekepope wrote:

    Nobody seems to get it! I have been writing COVERED CALLS since well before this outfit said to stay away from them. Sure you have to own the stock but you take all of the gambling aspects out of it. It is a license to steal. The only risk is that of owning stock to begin with (which may be bad enough anyway) but after that you just make money time after time.

    I started a $2,000.00 Roth IRA for my 17 year old grandson last November and by this November, we will be up around 40%. We make 3 or 4 trades every 2 or 3 months and that's it.

    Put $2,000.00 at even a lesser rate of 25% or 30% with a 50 year time frame (until he would retire) in a compound interest calculator and you get some REALLY big numbers.

    Even with a shorter time frame for someone older, if you put a bigger amount in (which all kinds of people already have in IRAs) you can still do well by retirement time.

    Some people obviously understand calls because they do exist but I can't find many people that do and nobody seems to write any articles on that aspect of option trading. They all deal with what is in this article and all of the comments which is pretty much just the gambling side of options. They hope the market goes one way or the other. We really don't much care.

    You know ahead of time how much you are going to make. We pretty much just write "in the money" calls but with Roth we don't have to worry about a stock "going" as far as taxes are concerned. Plus you have some downside protection which is pretty nice in the markets of the last few years.

    WRITE COVERED CALLS.

  • Report this Comment On August 14, 2009, at 5:13 PM, henryking54 wrote:

    <<They're basic yet effective tools to buy a stock cheaper, or sell a stock higher>>

    This statement by Jeff Fischer is grossly misleading.

    Selling a put below the current market price of the stock brings in some income, but if the stock takes off to the upside you lose out on all those gains that you would have enjoyed by simply buying the stock.

    Similarly, selling a call above the current market price of the stock brings in some income, but if the stock takes off to the upside you lose out on all those gains that you would have enjoyed if you hadn't sold the covered call.

    <<Options usually generate shorter-term gains, and this allows you to let your stocks be longer-term holdings>>

    Completely false. Selling covered calls often forces you to sell your stock because the call gets exercised. It certainly does not let your stocks be long-term holdings!

    <<when you buy options, you usually buy them using strategies that protect you on the downside (you know exactly the amount you're risking)>>

    By definition, buying an option limits your risk to the price you pay for that option. There is no "strategy" involved.

    After reading Jeff Fischer's response to my earlier post, it is clear to me that he knows nothing about how options really work.

    Anyone thinking of purchasing an options newsletter would be MUCH better off subscribing to either redoption.com or Morningstar Options Investor:

    www.redoption.com

    http://option.morningstar.com/OptionReg/pre.html

    Scott Snyder of redoption.com was a CBOE floor trader for 30 years. In contrast, Jeff Fischer didn't even trade options until a few years ago.

  • Report this Comment On August 14, 2009, at 5:27 PM, zekepope wrote:

    This will be my last post on this subject. I don't want to argue with anyone but henryking54 proves my point. He sure understands options but he says in two places "if the stock" etc. In my book that is gambling. I can consistently make 5, 6 or 7% every 2 or 3 months. Annualized, that is a pretty good return and I don't have to think about "if" anything. I am going to Happy Hour. I still say:

    WRITE COVERED CALLS

  • Report this Comment On August 14, 2009, at 5:39 PM, RaulChapin wrote:

    Please note that my criticism does not mean that I do not value TMF, just that I think it is no longer as safe as it used to be, more like a good movie with an R rating to it.... for mature audience only :-)

  • Report this Comment On August 14, 2009, at 6:03 PM, EagleWings wrote:

    Jeff,

    Your last post cleared things up a bit more for me. Thanks.

  • Report this Comment On August 14, 2009, at 7:17 PM, multi007 wrote:

    Ok I just watched the 8/15/09 airing of Mad Money where Cramer gave a list of "rules" for investing. He just scared me away from learning what options are and how to use them. He said "I have seen people close their doors and lose everything because of "put options" - whatever they are. So im out. I'll just still with old fashion equity trading.

  • Report this Comment On August 14, 2009, at 7:44 PM, 181736065 wrote:

    TMF is realizing that their old "buy and hold" strategy didn't work that well over over the last several years for many of their subscribers.

    That's one of the "bottom lines" I get from all these "alternative" "esoteric" new newsletters (Pro and the new Options newsletter)..

    Otherwise.. why even venture into "options"?

    I am glad TMF are changing their attitude and admitting that "buy and hold" just doesn't cut it when it comes to being a complete investor anymore! I have been using options for years. I have shorted indexes, and I have made money over the past two years (while "buy and holds" have lost money).

    Investing today is tricky. Unless you are prepared to use all the tools available you run the risk of losing a lot of money. In fact, with all the "computerized trading:" now-a-days, you are at a disadvantage to begin with.

    So. let's see what they say about "options". Let's see how they believe we can beet all the multi-billion $ quant models that are affecting the markets today.

    They believe that "options" can be a "Stand-a-lone" investment activity.

    Good bye "buy and hold". Hello options. Hello SHORT TERM as an Stand-a-lone activity. I don't need anything else according to The Fool!!!

    I quote: TMF options newsletter will be ... "THE PERFECT STANDALONE SERVICE" (creating) "IMPRESSIVE GAINS".

    You don't either. I guess all you "buy and holder's" have been saps... you should have been using options.

    I'm looking forward to hearing about it!

    TMF is changing course. Get with it everyone!

    (Sarcastically),

    Bill

  • Report this Comment On August 14, 2009, at 8:02 PM, rockwood77 wrote:

    Just ask their Attorneys, Shyster, Shyster and Flywheel!

  • Report this Comment On August 14, 2009, at 8:28 PM, gameguru wrote:

    Thanks to henryking54 for a link to an excellent article - it is definitely worth revisiting the reasons for a position. Obviously, TMF is more than just Bill Mann's opinion, although he has been one of the most prominent voices (and one of my personal favorites). There is a wealth of information in the older TMF articles that likely gets passed over by many current users.

    I do find myself wondering about the recent timing of the introduction of new options services from TMF. (It is not just TMF, by the way: I recently noticed that Optionetics has joined the usual cadre of late-night infomercials. Their pitch reinforces my belief that anytime someone sells you a financial service there is more money to be made in selling the service than in implementing it.) It seems to me that because of the extended downturn in the market and the recent high volatility levels, options seem more appealing at present because they have higher prices (and potentially higher mispricings) and because it has been difficult to profit on the long side (recent rally notwithstanding).

    I also wonder about some of the marketing claims regarding Jeff's options performance. To my mind, options performance should be measured in comparison to how you would have done by simply buying (or selling) the stock within the same timeframe. In the case of selling covered calls, one counts the premium as a profit whether the stock stays flat or drops (note that in this case the option is clearly better than owning the stock alone), while the premium plus the strike price counts as a profit (assuming the strike is above your initial buy price) if the shares get called away. In the latter case, however, you've only really made a successful options trade if the stock price is between the strike and the strike plus premium. My guess is that Jeff's record is not debiting him in the cases where the stock price at expiration exceeded the strike plus premium. (Note that this is technically a profitable trade, but I would not call it a successful options trade because you were wrong about the direction and/or magnitude of the underlying stock movement). In a tax-free account, this can nonetheless be a very stable way to generate consistent profits - you just have to keep an eye on your trading costs and use it with reliable underlying stocks. (Note that you can also sometimes get "cheated" out of a dividend payment if the option is exercised early to take advantage of an ex-dividend date.)

    For selling puts, sure you profit from the premium if the stock price remains above your strike price, but you actually lose out if the stock price drops below your strike and then rises by more than the premium before expiration. Again, I'm guessing the advertised record doesn't count such situations as a debit. In general, options are good for helping to increase the likelihood that you'll make a small profit at the expense of a lower-probability larger profit. For some investors, that may be a welcome trade-off.

    The potential problem with options is that you have to be right twice - first on the issue of *whether* a stock is overvalued, undervalued, or fairly valued (which guides your decision to deal in puts, calls, or both); second on the issue of *when* this situation will change (which guides the expiration date you choose). I know that I have enough trouble being right on just the first aspect. Nonetheless, I have used covered calls and selling puts to effectively be paid for placing a "time-sensitive" limit order.

    To his credit, Jeff acknowledges the trade-off of the upside potential and has an ability to present options extremely clearly. He also puts an enormous amount of time and effort into discussion and answering questions on the boards. Options can be used to limit risk, but at a cost of either limiting upside or of limiting the timeframe within which your thesis must play out. For instance, buying puts is clearly less risky than simply shorting a stock because your total loss cannot be greater than 100% (still not an outcome I'd like to see). It is important to know how options work and to have guidelines for their use, which I expect the TMF service will help with, but my guess is that in an extended bull market, such services will again wane in popularity and will be seen by many as having limited their gains.

  • Report this Comment On August 14, 2009, at 8:50 PM, ansu wrote:

    I went from $1000. to retire in 6 years, no stock market or options, it can be done, 1968 to 1974. there are other ways to make money.

  • Report this Comment On August 14, 2009, at 8:54 PM, ansu wrote:

    I went from $1000. to retire in 6 years, no stock or options, it can be done.

  • Report this Comment On August 14, 2009, at 9:07 PM, TMFCanuck wrote:

    Hi Fools (and Jim),

    I'm not sure I'm going to add much here - Jeff's done fine work already, the opinions of those with immovable axes to grind for their own purposes, perhaps to the contrary.

    My take on a Foolish options product is to indeed make them 'Foolish'. The first concern that should be dispelled is that we take a trading approach.

    And perhaps, the disparity ends there. If you think options are solely trading vehicles, well, then Pro, or the new service aren't for you.

    Options though this new service might be, Fools we still are. And that means we're still business-focused investors, spending the majority of our time on the underlying businesses. I've long believed, and practiced, that options can be Foolish when overlaid strategically on top of the business and financial analysis that goes into (should go into) an equity investment. Since options are 'derivatives', meaning that they derive their value from something else...it only seems prudent to seek to understand that something else.

    Look - I'm not here to talk anyone into the service. If you decide to kick the tires and take us for a test drive - fantastic! If you decide that options aren't for you, that's groovy too - I've long believed that the (large) majority of individual investors can happily go about their investing lives without ever utilizing option strategies.

    If you are setting your flag by, "Well, The Motley Fool said X way back when, and so their transition to providing services that utilize options is very, very, bad - shame on TMF" there's little I can do to sway you. All I'll offer is that the word 'Motley' is there for a reason. Bill Mann doesn't like options - great (it was a great article too) - I count Bill as among my closest Foolish friends and respect his opinion, though I don't agree with it. Tom and Dave back in the day didn't like options for individuals? Fine enough. The Fool is all about disparate opinions and divergent paths, all leading to same ground.

    You'd have to be blind to not have noticed the plethora of options services and trading schemes popping up in the past couple of years (**cue the cries of "Aha! They're just looking to cash in on a recent trend!**) And, frankly, a lot of them are little more than red or green flashing 'lights' on a software panel. As part of the option service of the Fool (Pro and the new service), we're big on the Foolish mission of education (as well as enrich and amuse, obviously). We're not blindly following software - we're focused on educating how options work, what your payoffs are, what the price does before expiry, what advantages/disadvantages exist with different strategies, and when to employ different strategies. And we'll even throw in a little Black-Scholes and binomial pricing models for the truly mathematically interested.

    There are so many approaches, as Jeff has said, to employ options, and so many strategies to accomplish varied goals, that I think the Fool has not abandoned its core principles, but rather have come to something of a Keynes moment:

    "When the facts change, I change my mind. What do you do sir?"

    The facts that have changed are this: Options, and their availabiltiy to the individual has never been easier (something both exciting and dangerous). And in Jeff (and I'd like to think, myself) we've got Fools who have demonstrated that a Foolish use of options is not an oxymoron. (Were this a trading service, rapid turnover, software telling you what to do, volatility trading, looking to beat the quants and their $30 billion computers, it never would have seen the light of day - and rightly so). We're heavily focused on valuation and understanding of the underlying company and its prospects, then overlaying strategic uses of options on top.

    And the core principle with employing options that I'm certainly hoping to teach in the service is blatantly stolen from science-fiction author Robert A. Heinlein and his book, 'The Moon is a Harsh Mistress'.

    TANSTAAFL - There Ain't No Such Thing As A Free Lunch.

    Everything you do with options has tradeoffs. You enter into each strategy with goals and intents. Sometimes they'll work out - sometimes they won't. Sometimes they'll work out spectacularly. Sometimes they decidedly will not. For folks so far undecided, if this floats your boat - great. If not, no worries, and the best to you in your investing career.

    Best,

    Jim

  • Report this Comment On August 14, 2009, at 9:28 PM, 181736065 wrote:

    JIm,

    I am open minded.

    Therefore, I will take an initial subscription and see if it is my cup of tea.

    Bill

  • Report this Comment On August 14, 2009, at 10:47 PM, simonkathrein wrote:

    Options can be a powerful way to actually reduce risk and increase profits if used more for saftey than for leverage. People get in trouble when they buy out-of-the-money options for a cheap cost that have a short expiration. We just posted a series of articles from one of my mentors that teach this concept in detail, and i have been using it for a year now with great results.

    The basic idea is to find the stock you think will move in a certain direction (up or down) and purchase deep in-the-money options with a long term expiry that will go up in value as the stock moves in the desired direction (calls or puts). Because options increase exponentially, you can put a small amount in and keep the rest in cash. Your only risk is the amount you paid for the option.

    ie... If i think XYZ company is going up, and I normally would put $10,000 into the stock as a position, with options i might trade it this way: I would buy $1500 worth of deep in-the-money call options that have at least a 6 month expiry... and keep the other $8500 in an interest bearing account and consider it part of a full $10,000 position. My risk is $1500 which would represent a 15% stop had i actually owned 10k worth of the stock, but these specific options will increase in value almost as much as if i had actually owned the stock. If the actual stock increased by 1%... i would expect these options to increase between 8-15% for every 1% move in the stock. If the stock went up 10% in 3 months, my $1500 should have made me $800 to $1500 approx. If I was wrong and my stock dropped by 20% one morning, my options could still be sold for $700 to $1000 giving me only a 8-10% loss on the whole 10k position. Sounds confusing, but check out this article and read the whole series to learn more about it in detail.

    http://stockcapitalist.com/understanding-options-delta-part-...

  • Report this Comment On August 14, 2009, at 11:29 PM, w7ov wrote:

    I had a similar experience - in 1987 I lost 90% of my net worth betting AMD would continue its normal 18-22 range of trading. I learned very much the hard way that writing puts can be very expensive - AMD went from $20 to $10 that day and the holder of my puts immediately "put" his stock to me. A few margin calls later nearly completely wiped me out and I was cured of writing puts... I got about $2 for my AMD 20 puts, I could have saved myself some grief if I had bought AMD 17.5 puts at $0.25 to provide a cushion against a severe downside.

    SInce then I have been more conservative with my investing, taking a more long term approach, with limited covered call writing but mostly just holding stocks (such as HP, Intel and Oracle) for the long term. I retired in 2005 at age 51.

    - Bob

  • Report this Comment On August 15, 2009, at 3:04 AM, spi6880 wrote:

    We have CFDs in Australia (we have options also but they are dwarfed by the CFD volumes). CFDs can be traded over most stocks and most indices and commodities worldwide. I don't think you have these in the USA but they can provide huge leverage (eg. 1% margin on a blue chip stock, 5% on an index) without the time factor of an option and their prices move with the underlying. Great for hedging and trading and simpler to understand (IMHO).

    Paul

  • Report this Comment On August 15, 2009, at 3:59 AM, conducator wrote:

    1) choose your trading software.

    2) choose and organize the indicator set that works for you.

    3) run a scan on the market.

    4) buy (I never go short) and hold just to take the spike.

    5) make profits on 80% of your moves.

    That's the only way to avoid to be fooled again and again.

    I don't sell any kind of strategy or subscripition to any service but would like to show my results in trading stocks (I think I will buy an apartment in Cortina by the end of the year with my profits) if this helps.

    no63@inwind.it

  • Report this Comment On August 15, 2009, at 4:11 AM, jeffinak wrote:

    thinkorswim is another awesome options trading platform. And for those who think that this site is drumming up money just to soak you, they are not.

    The near future of the market is maybe up for a little longer, but gonna retrace and go down. The potential for it to go sideways for a long time exists. Unless you are Bullish on Obamas plan, and there are thousands to be made on your beliefs, I would look into options as a hedge against your buy and hold.

    My economy and job have not been impacted to the extent of the US. I live in alaska and work for the railroad. I trade options specifically, as opposed to buying stocks and hoping for the best.

    Learn to trade probabilities, as opposed to hopes.

    Its in the options

    Dont live a life without seeing alaska in the summer

    best investing wishes

    jeff

  • Report this Comment On August 15, 2009, at 8:13 AM, multi007 wrote:

    I just read an interesting little "options for beginniners" pdf from fool.com. It can be found here

    http://g.fool.com/art/download/50/tmf_optionsHandbook_0809.p...

    My question is about the "buying calls" option. The artical states the following:

    Let’s look at an example. Imagine that a stock that you know well has been hit hard and now trades at $27 per share. You believe the shares will rebound in the coming months or year. The market offers $30 call options on the stock that expire in 18 months for

    $1.50 per share. Therefore, 10 contracts, representing 1,000 shares of the stock, will cost you $1,500 plus commissions. This option contract gives you, its owner, the right to buy 1,000 shares of the

    stock at $30 any time before expiration.

    If your stock starts to rise again, your options will increase in value, too. Suppose the stock recovers all the way to $ 32 after a few months. Your option’s value would likely at least double to $3 or higher per contract. You’ve made 100% in a few months. If you

    had simply bought the stock, you’d only be up 18.5%.

    Of course, there is a flip side. Suppose your stock continues its decline to the abyss. Even 18 months later, it’s below $20, so your options expire worthless -- though hopefully you sold them at

    some point along the way to recoup part of your investment.

    My question is this: I think I finally understand the buying call options - but what is not clear is the maximum I could lose? If I were to buy 100 shares of HIG (Hartford Ins Group) outright - it would cost me about $20,000 If the stock drops to zero, I lose it all. But I would sell before it dropped too low based on my comfort level (perhaps 25% drop). With buy call options, if I am reading this excerpt correctly, would I only lose the cost of the contracts which would be $1500 - even if the stock price drops to zero? Is this correct? If this is correct, they why would I not want to limit my losses and leverage my upside?

  • Report this Comment On August 16, 2009, at 5:31 AM, dibble905 wrote:

    Derivatives are one of the most powerful tools in investment today. It satisfies the need of speculators and hedgers because of its leveraging capacity. By leverage, I am not speaking of 'debt' based leverage but 'fundamental' leverage - leverage that comes from the definition of derivatives. In most peoples lives, the most important derivatives would be single-stock options and index options.

    Here are some rules I follow:

    - Never sell a naked call (call options with no hedge in case of a bad bet)

    - If you are speculating on earnings or some other announcement, always use options and not the underlying; do not risk more equity than you need

    Here are some recommendations:

    - Options have time-value the closer the underlying is to the strike; One way to eliminate the time-value premium is to use option spreads (i.e. Buying a lower strike and Selling a higher strike)

    - If you are speculating, always have a plan B in case your speculation is wrong -- this may mean investing a very small amount into an opposite, highly unlikely outcome (which is most probably very cheap considering its unlikely outcome). In doing so, you make sure that, in case you make an absolutely wrong call, you could still potentially come out on top.

  • Report this Comment On August 16, 2009, at 2:21 PM, gameguru wrote:

    Jim Gilles (TMFCanuck) and Jeff Fischer are certainly capable of speaking up themselves if they feel it necessary. I just want to make it completely clear that my issues are almost entirely with the timing, tone and tenor of the marketing message assigned to Jeff's record and the new options service.

    I already gave my view of Jeff's valuable contributions to the board community. As for Jim, I do not know his full record regarding picks for the various services. What I do know is that he provides some of the most detailed and probing write-ups of company financials available at TMF and has made some extremely prescient calls on certain companies (PRAA for example). Now that Bill Mann has moved to the TMF Funds group, Jim is quite possibly the single TMF writer that I am most interested in reading. However, some of his theses have taken a relatively long time to play out, and so I do not know how well they will necessarily fit into an options strategy (although I do know that he employs options himself, as listed on his boards profile page).

    (Here is one thread that expresses the kind of admiration many TMF members have for Jim:

    http://boards.fool.com/Message.asp?mid=27326287&sort=who...

    Although I have my doubts as to the claims upon which the marketing message is built upon and I have doubts as to the financial merit that most TMF members will find in such a service, I have no doubt that Jim Gilles will provide thorough and insightful commentary in its pursuit.

  • Report this Comment On August 17, 2009, at 8:55 AM, 181736065 wrote:

    The above two published comments exemplify one of several good reasons why I continue to support TMF.

    Free speech.. and good arguments.

    The bottom line, however, is this: TMF has yet to prove it is better than the overall market indexes over the long term. But, over the short term, it does give guidance (good or bad) as well as knowledge.

    I only regret that TMF doesn't remove the "hype" and "exaggeration" from the ads.

    For example, I am almost certain that the Gardner's would not agree that the new "Options Letter" will qualify as a "stand-a-lone" investment vehicle for nearly any of their subscribers (At least the "NASA Scientist" wasn't named in the new promo piece!)

    Also, I wish there were less MF Sycophants hanging around here. But, isn't that always the case when you voluntarily rely on someone for something important? (And pay them, too boot!)

    Bill J.

  • Report this Comment On August 17, 2009, at 12:05 PM, henryking54 wrote:

    <<Free speech.. and good arguments.>>

    Both of the posts you are referring to were deleted by TMF censors. Do you still support TMF?

  • Report this Comment On August 17, 2009, at 1:06 PM, 181736065 wrote:

    <Both of the posts you are referring to were deleted by TMF censors. Do you still support TMF?>

    Well... that sucks.

    If that is true, and those two posts don't re-appear unchanged, or a suitable explanation is forwarded, TMF just lost nearly all credibility with me and I I guess I'll be canceling my subscriptions as I feel let down and betrayed..

    This proves to me TMF is about their own money.. and will "change on a dime" regrading philosophy and freedom of opinion in order to make a buck.

    I was disappointed when they started selling ad space on the site, and further disappointed by all the advertising hype.. now .. this may be the "last straw".. as, if nothing else, I valued their integrity

    Bill J.

  • Report this Comment On August 17, 2009, at 1:36 PM, TMFTwitty wrote:

    Bill,

    Posting personal information or personal attacks will often get comments removed. You may note that some comments from both sides of this argument have been removed. Strong criticisms of the Fool are insufficient to cause removal; it must violate our rules in some way. I won't comment further here because it's way off topic, but I do monitor the Censorship board if you would like to visit there:

    http://boards.fool.com/Messages.asp?bid=113185

    Richard

  • Report this Comment On August 17, 2009, at 2:29 PM, 181736065 wrote:

    Richard...

    I guess that when it comes to money, political and religious views, and attacks on integrity..., reasonable men often act unreasonably.

    Bill J.

  • Report this Comment On August 17, 2009, at 4:25 PM, barbapapa wrote:

    Boy I hate those success stories that took place in the 80s and 90s. Back then, even a donkey could make money in the stock market.

    You want to impress me? How about showing me your performance over the last eight years?

    I used to be a big fan of the Fool, but their perma-bullishness has altered my opinion of them.

  • Report this Comment On August 17, 2009, at 9:33 PM, vgaymer wrote:

    ahem. back to the article. I still think, despite the increase in liquidity and lower fees, that the main contention that Bill Mann points out, that it's a zero-sum game, still holds. So I have many reservations about using options for the most part. It's a good way to lose money and I've learned the hard way lol.

    Even safer stuff like writing puts has issues. For one thing you have to realize that for cash-secured puts, you'd have to leave that cash dedicated to that option for the duration of the option or until you buy it back, so you have to calculate if the return would be worth it for your premium over that time frame.

    Moreover, even with an increase in liquidity, the spreads are still pretty wide except for a few high volume stocks/etfs.

    I do like some aspects of options in special scenarios

    1) allows me to go short without a margin account, a biggie for me.

    2) use call options to take advantage of market opportunities when you don't have the capital but anticipate having it by the option's expiration.

    And a few others in very infrequent situations.

    Cheers,

    G

  • Report this Comment On August 17, 2009, at 10:05 PM, TMFFischer wrote:

    To clear up some misunderstandings well up above now, about: 1) put writing making you miss a stock purchase; 2) call writing limiting your upside; 3) only using some options on some stocks, not all; and 4) strategies involved in buying options. Some points about each topic:

    1. I often will already own a stock that I write puts on, so the puts are written to potentially buy more shares and fill out a position completely. If the stock keeps going up, I already own shares. You do this on a case by case basis. Some stocks, you just buy all of your position outright. Some, you buy a partial position and also write puts. Some, you just write puts. All depends on the business and its price. You have a whole dynamic portfolio of pure stocks, some stocks that you also have some options on, and some straight option positions. And really, they should all work together and they're all based on stock knowledge.

    2. You only write covered calls when you're ready and willing to sell a stock a bit higher. But even in those cases, sometimes you only cover some of your shares, not all of them, leaving you all the upside on the rest. And again, you only write covered calls on some holdings, when they're up near fair value.

    3. You let options on some stock positions be your short-term winners, and this means a majority of your portfolio positions are straight stock that can go on to be long-term gains. This is the simple strategy of only using options on some of your stocks -- those where it is most beneficial or appropriate -- and letting the rest of your stocks be long-term holdings, untouched (until or unless the situation changes and options make sense on some of those stocks later on, naturally).

    4. There is a great deal of strategy involved in buying options: do you buy in-the-money options and pay a bit more for them but give yourself more wiggle room, or do you buy well out-of-the money options and pay much less upfront (to give just two small examples). It all depends on the situation. And what I was also alluding to when it comes to option buying strategies is to writes sensible options to pay for the options you buy (so you're risking even less of your own cash), and so forth. There are so many ways to approach buying options.

    Bottom line: you use options to make yourself a better stock investor, an investor who doesn't need the market to only go up to make money. You don't take dumb risks, and you don't speculate (unless that's part of your desire). Options are strategic tools to improve, complement, grow or help protect your stock returns.

    Jeff

  • Report this Comment On August 18, 2009, at 6:50 AM, x1x2x3x4444 wrote:

    I spent almost 20 years as a *financial writer* for newspapers and magazines - covering a variety of issues - everything from IPOs, public companies, white collar crime, etc.

    I never wrote much about options - but I remember what the CFTC and the FIA used to tell people - "99 percent of everyone who invests in options lose 100 percent of their money."

    I doubt this has changed.

  • Report this Comment On August 18, 2009, at 9:47 AM, 181736065 wrote:

    <I remember what the CFTC and the FIA used to tell people - "99 percent of everyone who invests in options lose 100 percent of their money.">

    I ran an options company for about five years, and "wrote my own book" on the customers positions. I have seen a lot of people make and lose money in options. Including me!

    IMO...

    If you BUY options not using insider info, in most instances, you will mostly working against the odds. The market, or options writer, always seems to price in the right amount of "insurance" in the pricing.

    But if you WRITE them, or use somewhat sophisticated spreads, then you have at least a 50 - 50 chance of making money on them (less the cost of trading).

    I'm hopeful that the newsletter will cover these areas, so everyone here can use options and not fall victim to what happens to most who have ventured into this arena.

    Bill J.

  • Report this Comment On August 18, 2009, at 11:32 AM, Broken196 wrote:

    I agree 100% with Jeff on his opinion of options and he use of them.

    Consistent returns are key to me even if it's only 5-6% a month. That being said, own stocks you like (preferably dividend stocks) and evaluate what you think the stock is worth. This satisfies the buy and hold crowd of TMF. If you want to buy more of that stock write a put option for the strike price you are happy buying at (keep in mind the premium and the fact your cash is locked up until expiration). It might not be worth writing a put option for that stock if the premium is low, so you can just wait.

    Assuming you do your homework and you own that same stock and you want to secure an exit point to lock in you profits write a cover call. Collect that premium until expiration. If the stock slides you pocket the premium and you reduce your original purchase price of the stock.

    The way I have looked at writing options is to lower my original purchase price of the stock by collecting premiums. .50 here and there will add up especially if you are writing at large volumes. Another GREAT stock to write CC's on is QQQQ.

    Keep in mind writing options require a fair amount of capital to generate monthly income.

    Don't jump into something on someone else's word. Do the research to convince yourself.

  • Report this Comment On August 18, 2009, at 9:50 PM, HarryCarysGhost wrote:

    The Cboe has a nice tutoirial on option trading. I just took it last month, they give you 30 lessons and then a

    quiz at the end of each lesson.

    The only reason I wanted to learn about options was when 3m was below $50. Since I work with there products I knew the stock price would go up.

    I could either take out a margin account(not recommended) or buy the calls. well I would have made some serious money buying the calls.

    Just type in CBOE for options info no fees involved. If anyone does'nt know this is the Chicacago Board Options Exchange and I have no vested interest.

    Just hate to see people pay for information you could get for free.

  • Report this Comment On August 20, 2009, at 2:28 PM, comissar wrote:

    henryking54 in an earlier post called Jeff Fischers' statements 'misleading' and recommended Morningstar and others as a better source of options information. But Jeff didn't say anything that conflicts with Morningstar's common articles or tutorials, nor did he conflict with anything the CBOE tutorials (or many books on the topic) say.

    Also, contrary to many articles, including the early Bill Mann article quoted at the beginning of this thread, options are NOT a zero sum game. Here's an excellent Morningstar article that discusses this point.

    http://news.morningstar.com/articlenet/article.aspx?id=29622...

    People buy options, like insurance, with different time horizons and goals. Selling a put may be an opportunity for one person to buy a stock at less than current market; for another, buying that same put may be looked at as a way to protect a gain. Both sides of the trade can be happy with the outcome.

    It's also silly to talk about missed opportunities as losses. The risk is very different. What makes options a nice compliment to TMF investing stragegies is that you can stick to options on stocks that you already feel good about in the long term, and reduce the risk. And options do take advantage of "Market Drift", or the underlying trend.

    I like to write puts on a stock that I want, thereby either making some money or acquiring it at a lower price. Once I own it, I write covered calls to make more money until it's called away (at a good price). Lather, rinse, repeat. Sometimes I'll miss a large runup, or buy when the stock is dropping, but my cost basis is improved and my portfolio value doesn't swing as wildly as it might otherwise. In fact, the worst case scenario leaves me with more money than buy and hold would have - at the expense of a reduced upside. And I get to make money when the stock doesn't even move.

    And yes, I still consider this a long term commitment to a stock. Every position (combination of stock ownership and put or call contracts bought or sold against it for a defined period) I treat as an individual transaction based on the belief that the underlying stock is more likely to go up than down over time, a belief gained by the traditional TMF valuation methods. So I do my risk analysis by pretending that I just bought the underlying stock (even if I already own it) and that I would sell it at the end for market price (even if I would really keep it) and include the relevant transaction costs I would have incurred either way, and compare that to buy and hold for the same period. The option position is far easier to quantify the risk on, and about half the time I do own the stock and do get the underlying gains anyway. Once I quit believing in the stock, I quit trading options on it.

    Options often provide a way to make a smaller gain at very low risk. Yes, you may forgo the chance for a much higher gain, but also with much higher risk. Nearly every book or article about options trading focuses all of the attention on making a very exact estimate of the risk vs. reward over a finite period of time, something nearly impossible to do quantitatively with stock purchases.

    People seem to be upset because TMF is changing their stance. I would call it more of a broadening. They are not advocating options as a leverage mechanism (few people do), and they do say that one must do the legwork to find an option position that has well defined and limited risk that matches your goals. It isn't for everybody, but I'm glad they are expanding their education horizons.

    Stan

  • Report this Comment On August 21, 2009, at 10:02 PM, royhg wrote:

    <I>AMD went from $20 to $10 that day and the holder of my puts immediately "put" his stock to me. A few margin calls later nearly completely wiped me out and I was cured of writing puts..</I>

    (1) as you yourself go on to say, buying simultaneously a lower strike put (and creating a bull put spread) would have limited your losses, though cut into your potential winnings by the cost of the long put.

    (2) The put writer often has the intention of wanting to buy the stock at a lower price than the strike. You can set this to trigger and thus also avoid the situation in (1). The money received from the original selling of the put offsets that much of the stock price less the cost of buying back the put (and less commissions).

    (3) you've got to watch options, imo. In other words, lots more time in front of the screen. The up side is that this might increase your enjoyment of your day job.

    (4) thinkorswim, per another poster, is an excellent brokerage, in my experience, for trading options. Other things too.

  • Report this Comment On August 21, 2009, at 10:05 PM, royhg wrote:

    Sorry, I say in (2) above:

    <I>>You can set this to trigger and thus also avoid the situation in (1).</I>

    What I meant to say was: "and thus also avoid the original poster's situation."

  • Report this Comment On August 27, 2009, at 11:26 PM, AirForceFool wrote:

    All the drama... hard to understand... options provide both sides of the fence with options (pun intended)... if you've got all your shares in a company directed 401k, and you can buy a put as insurance to ensure your Enron shares don't go to zero before you retire, then good for you... if the shares stay above your strike, you'll be really happy to pay out a quarter or two to ensure your not toast... a total rip-off buy some poor Fool that estimates the shares will stay above a certain point... well, good for that guy as well... honestly, no one should even bother buying shares outright... let's take ISRG for example... you want to buy shares... price is $225.81... you sell an in the money put, and get the shares for a couple of bucks cheaper... does someone lose a few bucks on the trade... sure... they traded the few bucks for the reduced risk or what not... sheesh... it's called capitalism folks... ever buy a used car from someone and offer them less then the asking price? Why would you do that? Why would you want to rip them off like that? Ummmmm... because I don't want to spend more for a car then I have to... well, I for one don't want to spend more for my shares then I have to... oh, and when it comes time to sell the shares, I'll probably sell calls against them, so someone will give me a bit more then the current asking price... I'm going to need the extra money for the guest house next to the pool...

    Should the average investor use options? Of course not... not sure about the rest of you guys, but the folks I work with are having a difficult time picking a mutual fund, let alone an individual stock, let alone an options chain against a particular stock... but many of the folks around these parts are big kids who spend 30-40 hours a week researching stocks... MF offers different investment services (yes ladies and gentlemen... for a profit!)... if the service doesn't fit your needs, then don't use it... show me a person who's lost a bunch of money listening to the Fool, and I'll show you someone that needs to take responsibility for their own financial future... if you want someone to burn through all your money, get a broker...

    Chris...

    who isn't afraid to bash Fool advice when it's warranted... anyone buy HW shares back in the day?

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