What does everyone want to get out of trading?

For most people they want to get rich quick. Of course that’s a hell of a lot easier said than done. The only way to get rich quick in this game is to use massive leverage. The problem of course is with massive leverage it’s very easy to get poor quick.

I’m talking about options for the most part, but the same principles apply to the 3X ETF’s.

I see people posting they are taking options trades all the time. At every DCL or potential DCL, and even in the middle of cycles. Unfortunately the only time options really work well is during a strong trending move. The problem is those kind of moves are rare. They only come around maybe once or twice a year and sometimes an entire year can go by with no trending moves anywhere. This is why option sellers usually make money, and option buyers usually lose money. Only rarely do the conditions fall into place to make any real money on option trades.

Here’s what happens to most option traders:

I say I think a market is going up.

They take that to mean it’s open season on call options. So they go all in buying out of the money calls. The market then proceeds to wiggle around for a few weeks, not making any real headway. Those out of the money call options can lose 50% or more of their value on a very slight wiggle in the wrong direction. A wiggle doesn’t mean one has the wrong trade on, usually the market does end up moving in the direction I anticipate. But the problem is almost no one can survive the agony of watching their portfolio get cut in half or worse even though the underlying security really isn’t doing any thing wrong, and ultimately you probably have the correct trade on. They end up panicking and selling at the bottom of a wiggle and then several days or weeks later the security starts going up and you beat your head against the wall because you couldn’t hang on.

Here’s another scenario that often happens. Let’s say you survive any initial wiggles, and your trade starts to make money (or we get lucky and it starts moving up immediately). Then you get a move down into a HCL, or just a 2-3 day pullback. You watch as all your profits evaporate and your profitable trade turns negative, maybe deeply negative. You again sell at the bottom of the correction because you can’t risk having the trade go against you and losing everything. A 2-3 day pullback doesn’t mean the trend is reversing, but without a crystal ball you can’t possibly know whether it is or isn’t. You sell. Then what happens? The trend resumes and if you could have held on you would have made money.

Markets that have lots of wiggles back in forth are an option buyers nightmare. It’s next to impossible to make any sustainable gains trading options in choppy environments, and unfortunately this is the pattern most of the time for all market’s. They are stuck in ranges, or in very choppy trends. These markets are heaven for option sellers, but hell for the fools that are buying.

If you are one of those people constantly trading options, understand that 90-95% of the time you are going to lose money simply because most of the time the conditions for making money with options aren’t present. So adjust your position size accordingly and expect to lose money anytime you buy an option. Every once in awhile the conditions will pop up for option sellers to get destroyed and option buyers to make a killing.

The best time to take option trades is at ICL’s. But as we all know during an ICL it always looks like price is going lower, and usually it does go lower as most traders buy too early. So despite the fact that this is the best time to back up the truck with leverage it’s not easy to do in real time.

If you can’t resist option leverage then bet small and expect to lose money as you almost certainly will most of the time.