Your options trading style sounds promising, but can I lose money at this?

There is only one guarantee in options trading--or virtually any form of investment for that matter--at some point, some time you are going to lose some money. One way to look at trading options is you get paid to take on risk. Once in a while a trade for whatever reason is not going to work out, the key to being successful is to make losing trades stay in the “once in a while” category instead of the “losing streak” category.

We keep losing trades to a minimum by trading with several really important “secrets” that literally stack the deck in your favor on every trade. Some of the more important “deck stackers” are trading in the direction of the trend (as old Sir Isaac said, “An object in motion tends to stay in motion”), getting time decay to work for you, and getting volatility to work for you (just employing these three makes your odds go up enormously). Plus we use a battery of fundamental and technical analysis to put the odds in your favor even more.

In addition to stacking the deck in your favor we “hedge” every trade, this is a technique where we essentially insure every trade so you know going in what your maximum risk is. That is so important because if you trade long enough sooner or later the market will throw you a surprise that turns a trade into a “worst case scenario”. Once you know up front you can survive the absolute worst case, it gives you the confidence to realize that no matter what happens you will survive to make money another day.

How much should I start with in my options trading account?

If you are just starting out trading options we recommend an account size of no more than $10,000. If that is too much for you right now you can go down to $5,000 but it is very difficult to trade with less money than that because of margin requirements on spread trades (a low risk trading strategy we love). So $5,000 really is the minimum amount you can start with.

We also strongly recommend not putting more than 5% of your account into any one trade. If you are starting out with the minimum you can put in up to 10% on one trade but decrease that percentage as your account grows. Even though it's extremely tempting DON'T GET GREEDY. Resist the very strong temptation to "make a killing" on one or two trades. This temptation is always the strongest after you've had a whole series of winning trades with no losers. Sometimes we have 8 or 10 trades in a row that make money! You start thinking, "Wow, I made quite a bit on that trade, imagine if I had put in twice as much money...". That kind of thinking leads to eventual heartbreak--just keep it slow and steady.

In fact the people that manage the big hedge funds and mutual funds typically only put 1% to 2% in any one trade. The reason for this is if they guess totally wrong they'll still be around to trade tomorrow (it happens to the best of them--- that's why they call it a game).

Trading with a small percentage of your account on each trade really isn't going to slow you down much. Even our absolute most conservative trades typically yield the same amount in a month as a super successful mutual fund yields in one of their very best years. Throw in the compounding effects on your profits and now you are riding the "rocket ship" to financial independence versus the "ox cart" mutual fund approach (the returns on a typical mutual fund will eventually make you rich, all you have to do is live to be 428 years old!).

As your account grows leave some money in to make bigger dollar sized trades while keeping your percentage trade of your total portfolio the same. Also take some of your profits out and put them into nice conservative interest bearing instruments, like Real Estate Investment Trusts or Income Producing Real Estate or if the interest rate is decent--bonds or notes. The idea here being to make your dream of ongoing monthly Cashflow a reality in any economic situation for years to come---the feeling of freedom and security is indescribable.

When I applied to open a brokerage account they wanted me to fill out a whole bunch of paper work, what does it all mean and how should I fill it out?

When options first started trading back in the 1970s everybody got really excited because you could get so much leverage on your money. The problem is leverage is a two edged sword and if you make a mistake you can really lose a lot of money quickly and that’s exactly what a whole bunch of brand new options traders did. As litigious as our society is nowadays you can guess the rest of the story. The brokerage industry experienced an avalanche of lawsuits, the end product of which is the mountain of paper work your broker wants you to fill out before they will open an options account for you.

Basically your broker wants you to state on paper that you know what you are doing when it comes to options and you have the assets to withstand a loss. In other words they don’t want you to lose a bunch of money and blame them in the form of a nasty lawsuit. And to tell you the truth if you want to hang onto your money and actually have a chance of making a profit you better know what you are doing, which is why I mail out a comprehensive four chapter audio set to all our new subscribers.

These forms are on the honor system, your broker isn’t going to check and see if you’ve really got five years of options trading experience and you have a net worth of a million dollars, they just want to cover their assets in case you lose a bunch of money and decide you don’t want to take responsibility for your trades. If you’ve already made the decision to take responsibility for your financial decisions---a really important step toward financial independence no matter what your vehicle---then fill the forms out in the best light possible and submit them to your prospective broker.

If you tell your broker you have no experience trading options and have practically no money no broker in their right mind is going to let you trade spread plays or any other option strategies (can you blame them?). My only suggestion in this regard is to view your situation as the glass half full as opposed to half empty. It’s the same situation it’s just presented in the most positive light possible. You may need to "paper trade" without actually investing your money for awhile as you absorb what is on the audio set and get a feel for the lingo and how options work. This is a really smart way to go if you are a little unsure.

Education doesn't just take money, it takes time and a little effort. I always like to remember what Derek Bock the former President of Harvard had to say about the cost of education, "If you think the cost of education is high you should check the cost of ignorance". When it comes to options trading no truer words were ever spoken.

Do your options strategies involve selling “naked” options, because I heard that you have to have special clearance from your broker and I’ve also heard it’s pretty risky.

None of our options strategies involve selling naked options. Selling naked can be extremely risky and I’ve actually seen people lose their entire brokerage accounts and then some using what I consider to be a very reckless strategy. Absolutely every spread trade we do is hedged or protected in some way or another. That is how the pros do it and that is how they, and we, stay in the game in good times and bad.

I feel a big responsibility to educate people on the right way to trade---above all I don’t want anyone to get into trouble---that is why we are protected on every trade no matter what. Every trade you put on with Cashflow Heaven has a known limited maximum loss potential, you’ll know it before you do the trade and as the old saying goes, “You’ll be prepared for the worst but hope for the best”. The problem with selling naked is it is hard to quantify the downside because when you sell puts naked the risk can be extreme (from the current stock price all the way down to zero) and when you sell calls naked the risk is infinite (infinite can end up being quite a bit of money).

There is another old saying passed around among floor traders that goes like this, “When you go naked down wall street you can lose more than your dignity”---well said! Stick with the conservative options strategies and you’ll probably still blow away the returns from any mutual fund in the land and you’ll sleep better while you’re at it!