Wednesday, September 23, 2009


*** Ray Auxillou potting nuisance pigeons with a slingshot in his retirement garden, in Western Belize. ( September 2009 )


It’s been 20 years since I did OEX index option trading. I even wrote several books on it. Mostly I wrote them as references and reminders to myself. Then I went out of the business. Some libraries have the books. I made some money in stocks. That though was too slow and the annual returns too low for me. The game is sweeter if you can do it faster. Options are attractive because there is limited risk. When you lose your capital, that’s it baby. The end of the game. Whereas in futures and commodities, you have unlimited risk. You can lose your shirt, house, car and wife. I’m in retirement and it wasn’t either by trading options, or stocks, though both helped. It was real estate that we got our family nest egg for retirement. Real estate is a very slow game. Not exciting at all.
Options are harder to trade than futures, currencies and commodities and they take a different style. The attraction is ‘limited risk’.
That said; the statistics show 90% of the people who try option trading, go bust with their account. Only 10% make a professional living at it. Of the 10% that do make it, only 2% actually make big money. The rest make mediocre earnings. I’ve known a couple of traders that regularly made $75,000 a year, off a $50,000 starting stake each year. You probably can make between $75,000 and $150,000 if you are in the top 2%. Only the top trader in OEX index options is a GOLD MEDAL OLYMPIC QUALIFIER though.
The attraction with trading OEX index options is limited risk, the challenge of going against the best. There are probably no more than a thousand active OEX option traders at any one time? Lots try it and go bust and leave.
So what is involved with trading options? There are lots of choices, lots of indicators, lots of strategies, prices galore. Options are about TIME DECAY, MARKET DIRECTION, the SPREAD between the BID and ASK and the commission costs. In a nutshell that’s it. You can forget all the strategies. I’ve tried a lot of them. There are three things in options, and this is mostly MARKET DIRECTION. Now market direction is either UP, DOWN, or SIDEWAYS. No matter which direction you guess, the ODDS are going to be TWO to ONE against you. Your BREAKEVEN COSTS alone, mean you have to get the MARKET DIRECTION guess right, and the cost is usually around 3 ½ OEX index points of a move. Lots of times the MARKET DIRECTION can be right, but the move so slow, that daily TIME DECAY eats you up, before you move enough to break even.
If you experiment and try all the strategies, it always comes down to MARKET DIRECTION. Now this is not hard to guess. What is hard to guess is the TIME DURATION of your guess. We never know how long the market will go, or how far and how fast in a given, of the three directions.
The people who make money consistently in options are the sellers. They do better than the buyers. The buyers though, can make more money IF THEY CAN GET IT RIGHT!
If you are a gambler then it behooves you to BUY options. Buying has it’s own string of problems, not the least of which is the ODDS are TWO to ONE against you before you start. To win at BUYING you have to have the TIMING correct 100% of the time. Losses will whittle down your stake in quick order among other things. You lose to the loss and contrary market direction, you lose to time decay and you lose to the spread cost between the bid and ask, you lose to a market moving too slow and shallow, and you lose the cost of commissions. LOSSES are verboten! That said; a volatility day trader friend of mine, starts off with $50,000 each year and can have drawdowns ( losses ) that can drop him as low as $15,000 before he gets himself under control and turns it around. By the end of the year, he always seems to make his $75,000 profit target though. I couldn’t do that at all. Not in my character makeup.
So, how do you BUY to get a 100% correct TIMING DIRECTIONAL GUESS? There are oodles of indicators out there, and a few hundred trading systems. Most of which will work in one fashion or another. An example would be a simple moving average. Crossovers would tell you when to enter and exit. The problem is the other variables and nuances your brain must compute. One warning about technical indicators, they are based on historical data and inaccurate, usually about half a cycle back, which can be six or seven bars, of whatever time period you are trading. The future events corrects those indicators in the past as it happens, which doesn’t do you any good, because you must trade only by price, in the present moment. Only immediate price action counts. You cannot forecast the future from indicators.
Newbies always think if they had a set of rules and a system, that some winning trader had, they could get rich. Nothing could be further from the truth. Trading is not about a system, or rules, though both items are necessary to have. The battle in trading is with yourself.
EGO is probably the biggest problem. When you win a series of trades and are feeling like a rooster, ( crowing away and patting yourself on the back ) you start to make other mistakes. You get a swelled head and the market will turn against you. You become your own worst enemy. There is also the problem of RUNS. Runs come in winning and losing streaks. The SECRET is to find just one SIGNAL, or pattern, or indicator, or something you instinctively recognize, the moment you see it. A signal that says the market is going to go in one direction, or another, then you can pile it on and trade it and make your fortune. It only takes one signal! The problem with this is; it is boring waiting for the signal. Turtle traders in futures trading will tell you, they sometimes have to wait 8 months to get a viable trend signal in the Turtle Trading system. Its worse than the army, where you have short moments of rushing around, and lots of hours and days of waiting before hand. ( HURRY UP and WAIT! ) So IMPATIENCE kills a lot of traders. They overtrade, take too many shortcuts and try dubious things in their hurry to get rich quick. What they get is going broke quick. Your private price signal should give you two things. The direction and the probable strength of the move, meaning in the amount of index points covered and in the probably time frame. Option buyers are fast traders when they trade. The time frame is usually short. How short? Can be 7 minutes for a day trader, trading a volatility signal, or ten days in a position option trader. Or somewhere in between.
There are too many variables for me to discuss them all in this short piece. Like learning to play the guitar, or type on a keyboard using all your fingers and thumbs, or do a double back flip off a swimming pool diving board, only practice will make you skilful in the top 10%. Things you have to learn to control are GREED, PANIC, FEAR and second guessing yourself in whipsaws. That is the real secret in trading, not the methodology and rules. The latter are necessary and help, but not if you don’t control your emotions.
As you can guess, I’m getting ready to dip my toe in the water once again in my old age. Retirement is boring without a challenge. Don’t need the money, but do need the mental challenge! The money is only the measure of how successful you are. I’ve been in the top 10% before, but never in the top 2% and somehow I’d like to get there. To give you an analogy, as a youngster I was a long distance marathon runner. Often got in the top half, or the top third, and even occasionally in the top 15%. In option trading that is not enough skill, or stamina. Another analogy is learning to play the guitar. Can’t remember how many times I’ve relearned to play a half dozen musical instruments. It just is not my vocation. I lay off for a year or two, then have to go back and relearn all the old chords and songs again. What you need is constant daily skill and practice in option trading. As a newbie, I recommend you do a month diddling with historical data on a daily basis, picking out your SIGNAL to enter and exit. Then spend a minimum of three months paper trading. I’m just coming near the end of my new paper trading session. Longer practice is better, if you have the patience. Your skills have to become intuitive from built up practice and confidence. Only then move into real money. The game totally changes when you go from paper trading, to real money and losses and mistakes become real money. It is not funny to start with $10,000 and lose $7000 in two or three days. Very damaging to the EGO. The emotions kick in and turn you wild with adrenaline. The enemy is NEVER the market action, it is always YOU, the control of your emotions, if you picked your signals right. In any given month you can get four to eight signals to buy. Of those, only one or two signals will be the correct ones. Then the problem becomes dealing with the trade. Can you confidently sit through an unexpected reversal, while watching your money melt away? Will you grab profits too soon, instead of maximizing, where the riches really are? Sure, anybody can tell you when to enter and exit. Or sell you a trading methodology. Only YOU developing intuitive experience on the job, hands on, can turn you into a successful trader though. Otherwise you will end up in the 90% who tried and failed. NEVER use money you cannot afford to lose!
This is my second time around at catching the brass ring. For me this is FUN! Which of course is the real goal here, when you turn 72 years old. There isn’t much you can spend money on, to have fun, when you get old.

Ray Auxillou, email:

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