and you willbe forced into bad trading decisions.
Finally, the most important part of your game plan is not how manypositions to take and when to take them, but once you are in a position—when  do  you  take  proﬁts  and  when  do  you  cut  losses?  Here  you  mustclearly  deﬁne  when  to  take  proﬁts  or  cut  losses  before  you  place  thetrade, or your emotions will force you to do the wrong thing at the wrongtime.  Try  to  be  consistent.  Don’t  keep  changing  the  rules  of  your  gameplan in the middle of the strategy.
The  last  ingredient  to  success  is  ironclad  discipline.  You  may  thinkthat this step is the easiest one to implement, but discipline can be difﬁ-cult to maintain, especially in the midst of the battle when you may be in-curring losses and have to make some tough decisions. If you don’t haveyour trading plan written down on paper, and instead decide in your headwhat moves will be made at each point, your lack of discipline will catchup with you sooner or later. If you ﬁnd yourself straying from your gameplan, you are doomed, and you might as well liquidate all your positionsand  invest  in  some  Treasury  bills.  Without  discipline,  you  will  simplynever win the options game.
Options traders lose when they follow the crowd because the crowdfeeds on emotions. To proﬁt consistently, you must stand alone and act ra-tionally.  In  the  options  markets,  this  means  buying  underpricedoptions/selling  overpriced  options,  and  having  a  well-designed  tradingplan—one  that  shuns  your  emotions,  forces  you  to  be  consistent,  andkeeps you with a balanced, diversiﬁed portfolio.
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THE HEART OF MY TRADING APPROACH: OPTIONETICS
Over the years, I have taught my trading approach—which I call Optionet-ics—to thousands of people all over the world. The Optionetics philoso-phy  of  trading  is  not  just  valuable  to  beginners;  long-time  professionalsbeneﬁt as well. Overlaying the Optionetics way of trading with any tradingsystem that trades liquid markets can signiﬁcantly enhance that system’sperformance.  The  Optionetics  methodology  facilitates  the  implementa-tion of a system’s money management rules using a trading technique wor-thy of application.
To validate this assertion, I want to brieﬂy review the Optionetics phi-losophy, trading system basics, and money management approaches andconclude with the beneﬁcial impacts the Optionetics philosophy can haveon a trader’s current trading system.
So  just  what  do  the  Optionetics  philosophies  encompass?  The  ab-solute  crux  of  this  approach  can  be  classiﬁed  as  a  scientiﬁc  method  ofanalysis that utilizes options as tools to minimize risk exposure. Since riskis directly correlated to a trader’s number one nemesis—stress—it standsto reason that if you can get a good handle on risk, your ability to executeyour trading plan will accelerate.
The Optionetics approach to the markets predeﬁnes the risk and re-ward  of  each  and  every  trade  to  determine  its  feasibility.  Once  the  risk/reward ratio has been revealed and the maximum loss position is clearlydeﬁned, a natural calm comes over the trader that triggers a very pro-nounced  stress  level  reduction.  The  results  are  much  better  decisionmaking during the trade execution and management phase.
Another  major  beneﬁt  of  trading  the  Optionetics  way  is  that  it  sur-rounds your core trading or belief system with a ﬂexible investment plan.This ﬂexibility allows the traders to employ a variety of option strategiesthat best exploit the current market environment. For long-term survivalin  the  trading  business,  the  ability  to  change  directions  is  absolutely  es-sential. This attribute, which is at the heart of the Optionetics philosophy,turns the naturally dynamic trading environment of the markets into ex-tremely proﬁtable opportunities.
Now  let’s  take  a  look  at  what  constitutes  a  typical  trading  system.There are three building blocks in any system: market entry, exit with aproﬁt, and exit with a loss. Identifying these and making decisions aboutthem  is  a  key  element  in  a  successful  trading  system.  Before  you  trade,your system should tell you: Where should I get into the market? Whereshould I get out with a proﬁt? And where should I get out with a loss? Youneed to know the answer to all three of these questions before you trade.If you know the answer to only one or two, you do not have a completetrading  system.  An  effective  trading  system  has  to  clearly  delineate  the
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market entry price, the exit with a loss price, and ﬁnally the exit with aproﬁt price.
Of course, with all sound trading system approaches, the trader musthave  some  complementary  money  management  rules  that  can  be  effec-tively applied. Money management takes the trader past the point of no re-turn. For example, a trader who makes $100,000 over the next two yearsand then loses the $100,000 during the following two years has a return ofzero dollars.
Had  the  trader  used  proper  money  management,  the  $100,000  couldhave grown to $500,000 at the end of two years. Then, during a large losingperiod  as  much  as  $100,000  could  have  been  protected.  After  the  tradermade it to $500,000, the account was in a position to withstand just aboutany size drawdown, as long as the trader continued to apply money man-agement rules without going back down to zero.
This is why money management is so important. There is no need foryour account to reach the point of no return. Proper money managementdiscounts  all  factors  that  cannot  be  mathematically  proven.  In  addition,proper money management takes into account both risk and reward.
Now let’s examine how the Optionetics approach can enhance the im-plementation of both the trading system being employed as well as the ac-companying money management rules that are to be applied. The use ofputs and calls to hedge against long and short stock positions offers thefollowing four beneﬁts:
1. Greater protection than stop losses.2. Protection of stock positions from major losses.3. Elimination of the risk of receiving a margin call.4. Low maintenance requirement, allowing you to lock in proﬁts.
Given  the  fact  that  stop  losses  are  essential  components  of  a  goodmoney management system, the Optionetics approach provides a far su-perior method of protection through the utilization of options. For exam-ple, with the distinct possibility of a major gap down or up the traditionalstop loss can encounter major slippage. Employing an option as your riskreduction strategy eliminates this negative slippage impact.
Also, by clearly delineating the risk and reward picture of every trade,the Optionetics discipline automatically enforces the most important moneymanagement rules of them all. When a trading system generates the marketentry, market exit with loss, and market exit with proﬁt price levels the Op-tionetics methodology can really go to work. The approach allows you to ap-ply  the  optimum  options  strategy  based  on  the  system’s  forecasted  pricelevels as well as the underlying option’s current and forecasted volatility.
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Furthermore, the trader can be as ﬂexible as each trade demands. TheOptionetics approach enables traders to make adjustments based on mar-ket ﬂow, keep their positions intact by locking in proﬁts, continue to mini-mize risk, and provide the staying power to see the trade to fruition versusbeing continually whipsawed in and out of the market.
With so many beneﬁts of applying the Optionetics trading philosophy,it  behooves  the  trader  to  master  these  trading  principles  and  use  themfaithfully in conjunction with one’s current trading system. The improve-ment—not only in the system’s proﬁtability but also with better risk-to-reward proﬁles—makes it a very worthwhile endeavor indeed.
CONCLUSION
The markets by their very nature have multiple personalities. Perhaps theonly way to beat them is to get to know their personalities and learn howbest to use the right tools to help make winning decisions. In order to dowell  in  this  business,  you  need  to  cultivate  patience,  pursue  knowledge,garner experience, and always persevere.
By reading this book, you are opening yourself to a veritable anthologyof knowledge that has taken years to accumulate. Just remember, there area  million  trades  out  there  every  day.  It’s  just  you  and  your  trading  savvyagainst the world! The many tools and strategies discussed in this book areyour biggest allies. The more you get to know them, the better equippedyou’ll be to proﬁt in the highly volatile markets of the twenty-ﬁrst century.Perhaps we all have a fear of failure and the ever-pressing need to be-come successful. Accomplishing these very human goals usually takes alifetime. Along the way, I have found it absolutely necessary to nourish myself-conﬁdence by cultivating the disciplines that I seek to master. Tradingis one of those disciplines. Getting good at it has entailed developing dis-criminatory good taste as well as impeccable timing when it comes to thebuying and selling of options. And yes, timing really is everything in themarkets.  But  getting  good  at  timing  is  more  than  an  art;  it’s  also  a  sci-ence—the  science  of  Optionetics—and  through  it  you  can  develop  realtrading savvy. All it takes is a lot of practice and a little courage.
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APPENDIX A
TradingResources
TRADING MEDIA SOURCES
Futures Magazine
This  top-notch  monthly  magazine  as  well  as  its  online  counterpart  is  amust-read for ﬁnding great futures investment opportunities, understand-ing the markets, and learning all aspects of successful futures trading. Ithas an excellent editorial staff and offers in-depth analysis of futures mar-kets, trends, seasonal forecasting, and individual commodities.
www.futuresmag.comPhone: (888) 804-6612
Technical Analysis of Stocks & Commodities
This insightful monthly offers a good cross section of stock and commod-ity information. In some ways, it is more technical than other periodicals,but it’s a very good source of interesting trading ideas.
www.traders.comPhone: (800) 832-4642; (206) 938-0570
The Wall Street Journal
It  is  a  rare  event  to  ﬁnd  anyone  who  has  not  heard  of  The  Wall  StreetJournal (the Journal). This publication seems to have been around for-ever  and  will  undoubtedly  be  around  for  many  years  to  come.  With
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worldwide distribution and a wide readership in the United States, it hasthe  ability  to  inﬂuence  the  markets.  If  a  company  is  mentioned  in  TheWall  Street  Journal,  it  is  news.  The  Journal is  packed  with  informa-tion—some useful to the investor, some not. The following areas are themost useful for spotting investment opportunities, as well as providing aperspective of what is happening in the markets.
www.wsj.comPhone: (800) 568-7625
“What’s  News—Business  and  Finance”  (Front Page) This sectionis  the  ﬁrst  read  of  the  day.  In  just  a  few  minutes,  you  can  scan  sum-maries of the most important information you need. You can then turnto the detailed article if you ﬁnd something that interests you.
“Money  &  Investing”  (Main  Investment  Section) On the ﬁrst page ofthis section, you will ﬁnd the Markets Diary containing the following se-ries of graphs: stocks, international stocks, bonds and interest, U.S. dollarand currencies. These charts are placed here purposely. A knowledgeableinvestor can look at these charts individually and collectively to get a verygood  idea  as  to  the  outlook  for  the  U.S.  economy,  the  stock  market’sstrengths or weaknesses, and even what the world may think of U.S. eco-nomic prospects.
The second page of this section provides some valuable information
that many investors tend to overlook. This includes the following:
• Most Active Issues (Various Exchanges). Many stocks show up hereday after day. To spot proﬁtable trade opportunities, you want to locatethose that are new to the list. For example, while you may see Wal-Martand Intel on the list each day, it’s important to concentrate on ﬁndingthe new stocks. These new stocks have increased in volume for a rea-son. You may also ask your broker if any new stocks came out. If thereisn’t anything new, then this may be a good momentum investment timesince there may be news that hasn’t leaked out yet. Does this happen?Yes. It happens all the time, even though it’s not supposed to happen.• Price Percentage Gainers . . . and Losers. This is my favorite listing.If there were only two pieces of information I could look at to make asmart investment, I would pick these two because they reveal the stockswith  the  greatest  momentum  (up  or  down).  The  best  investments  arebased on momentum, at least in the short term. I watch these stocks likea hawk to see if they have momentum that is continuing (good or bad)or momentum that is slowing and reversing. I look for a chance to do theopposite  on  fast  movers  down  (price  percentage  losers)  by  lookingfor buying opportunities. I also like to buy on a fast mover up (price 
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percentage gainers). If a move up is missed, I look to sell as soon as themomentum starts slowing or reversing. Bottom line: Focus on the infor-mation in the Price Percentage Gainers and Losers columns and learnhow to use it intelligently (as described in this course) to make money.
“Marketplace” (Review  Front  Page) This  column  can  be  used  effec-tively  if  you  scan  for  news  that  is  dramatically  bullish  (good  news  thatshould  help  a  stock  price  go  up)  or  excessively  bearish  (bad  news  thatshould make a stock price go down). One of the best ways to use muchof  this  information is to do the opposite of the crowd by employing thecontrarian approach to investing. The theory behind this approach is thatthe  majority  of  the  investors  will  be  wrong  a  majority  of  the  time  (i.e.,most  people  lose  money  when  they  invest).  Look  for  information  thatsounds very optimistic or very pessimistic then watch these stocks to seehow they react once the information is in the marketplace.
Stock  Page  Headings Many people look at these tiny numbers andbecome overwhelmed. This section of the paper is easier to read once youknow which information is important to focus on.
• 52 Weeks Hi/Lo: High and Low Prices for the Past 52 Weeks. Impor-tant: This  ﬁgure  tells  you  the  price  change  of  a  stock  over  the  pastyear. The difference between the high and low is called the range. If astock  has  moved  only  $1  in  the  past  year,  it  is  likely  to  stay  in  thisrange. Also, if a stock is at its 52-week high, it may be ready to makenew highs. This is one you want to look at as a potential buy. If a stockis at a 52-week low, it could break down and go lower, which may be aselling opportunity (going short). It is generally stated on Wall Streetthat strength leads to strength and weakness leads to weakness. Sincemany investors use this information to make investment decisions, itcan have great inﬂuence on the directions of many stocks.
• Stock: Name  of  the  Company.  Important: Obviously,  you  need  to
know the name of the company and its abbreviation to trade it.
• Yld Div/%: Dividend Yield. Not Too Important: Unless you are buyingstocks  based  on  dividend  yield  (the  return  you  make  on  a  dividendpayout) and earnings, this is not a critical number. If you are buildinga long-term portfolio based on yields, then you will want to compareone stock versus another using this information. Many stocks—espe-cially  high-tech  stocks—will  have  a  low  dividend  yield  yet  are  stillgood investments.
• PE: Price-to-Earnings  Ratio.  Important: The  price-to-earnings  ratiotells you how many times the earnings a stock is trading at. For exam-ple, a stock with earnings of $1 per share and a price of $20 has a P/E of
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20. If the industry average is a P/E of 40, then this stock may be under-valued. If the stock is trading at a P/E of 100 ($100 per share) with theindustry average being a P/E of 40, then the stock is likely overvalued;on any sign of weakness, the stock will come tumbling down. Broker-age ﬁrm analysts establish guidelines for each industry. For example, aslow-growth industry, such as the steel industry, may have a P/E of only10, while a high-growth industry, such as the Internet businesses, mayhave a P/E of 40 or higher. These range signiﬁcantly. There are a num-ber of publications that list this information, including Value Line.
• Vol: Number of Shares of Stock Traded per Day. Important: This num-ber is important when the volume is increasing signiﬁcantly. For exam-ple, when a stock has an average share volume of 100,000 shares andthe stock trades ﬁve times that high (500,000), this information is use-ful.  If  the  stock  has  a  high  trading  volume  and  is  found  on  the  PricePercentage Gainers . . . and Losers list, then you have a conﬁrmationsignal that the stock is making a move. When volume is decreasing orstable, the stock will likely go nowhere as interest in the stock is dwin-dling. It is important to watch the volume of the stocks you own or aretrading to see whether there is a momentum increase or decrease.• Hi/Lo: High and Low Prices Yesterday. Not Critical: Unless you areday trading (going in and out during one trading session), this infor-mation is not critical. Investors and traders look at this informationto  signal  if  stock  traders  will  be  running  stops.  This  technique  canalso be used to look for orders from public traders. For example, if atrader  sold  a  stock  yesterday,  he  or  she  may  place  a  buy  stop  (tocover  losses)  above  yesterday’s  high.  This  is  referred  to  as  a  resis-tance point. If the trader bought a stock, he or she may place a sellstop (to sell the stock purchased) below yesterday’s low. This is re-ferred to as a support point. These techniques are used frequently forprotection  if  the  market  moves  against  the  original  position.  Note:The  technique  of  running  stops  is  used  by  many  investors  andtraders; however, it is not what I recommend. I prefer to use optionsto protect my investments, because I ﬁnd them to be more proﬁtableand safer in the long run.
• Close: Closing  Price  Yesterday;  Net  Chg: Change  in  Price  Yester-day.  Important: These  two  points  are  important  as  they  representthe dollar value a stock has changed. The net change value is basedon  where  the  price  of  the  stock  is  today  relative  to  yesterday’sclose.  If  a  stock  is  trading  at  $10  today,  and  it  closed  yesterday  at$8, then the stock has a net change of +$2. This 20 percent increaseis signiﬁcant (30 percent is even better). If a stock is trading todayat  $10  and  closed  yesterday  at  $20,  this  $10  drop  in  value  (50  per-cent) is very signiﬁcant.
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Note: The Wall Street Journal contains a great deal of information. Eachday,  I  scan  the  newspaper  and  look  for  clues  to  make  intelligent  invest-ment decisions. If you make an effort to learn to use The Wall Street Jour-nal to its fullest, you will have made a signiﬁcant investment in your owntrading education.
Investor’s Business Daily
Investor’s Business Daily (IBD) was started with the intent to add a newdimension of information to the investment community. IBD focuses onconcise investment news information—including sophisticated charts, ta-bles, and analytical tools—with the hope of adding valuable informationthat The  Wall  Street  Journal may  not  provide.  As  the  name  implies,  In-vestor’s  Business  Daily is  published  for  the  investor.  IBD is  an  excep-tional  daily  newspaper  for  an  investor  to  learn  about  the  markets  andlocate  proﬁtable  investment  opportunities.  It  is  an  excellent  publicationfor spotting stock patterns that can produce excellent trading proﬁts. It’swell worth the investment.
www.investors.comPhone: (800) 831-2525
Note: Since some of the information included in IBD has already been ex-plained in the previous Wall Street Journal description, I will refer to thisinformation when applicable.
“Executive News Summary” Located on the very ﬁrst page, this sec-tion is a brief, yet useful summary of the important news of the day. Onceagain, you want to focus on news events that are either extremely bullish(positive for the market or an individual stock) or very bearish (negativefor the market or an individual stock). If you ﬁnd an article worth explor-ing, you can go to the details within the article.
Stock  Tables:  Intelligent  Tables One  of  the  most  interesting  fea-tures in IBD is its “intelligent” tables developed for the major stock mar-kets.  These  contain  some  of  the  most  important  information  on  stocksbased on a number of technical indicators. IBD uses a number of standardtechnical indicators that will be reviewed in detail.
Note: Once  again,  you  need  to  focus  on  the  movers  and  shakers  in  themarket. If you focus on ordinary stocks you will produce ordinary ﬁnan-cial returns. As discussed in The Wall Street Journal section, you need tofocus on the stocks that have a reason to move. Stocks move on momen-tum either due to technical factors or because they are being watched bya large number of investors.
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You  will  ﬁnd  Intelligent  Tables  that  list  selected  stocks  with  the 
following indicators:
• Greatest % Rise in Volume.• Most Active.• Most % Up in Price.• Most % Down in Price.
You will also ﬁnd Intelligent Tables for the three major exchanges:
• New York Stock Exchange (NYSE).• Nasdaq over-the-counter issues.• American Stock Exchange (AMEX).
Table Column Headings• EPS  Rnk.: Earnings  per  Share  Growth  Rank. Important: This  num-ber is calculated as an average of ﬁve-year earnings per share growthand stability and the EPS growth the last two quarters. The resultingnumber is compared to other companies in the table and given a rankof 1 (lowest) to 99 (highest). Focus on companies with an EPS rank-ing of 95 or better when buying and 20 or lower when selling (i.e., buystocks  with  the  greatest  strength  and  sell  the  weakest).  It  is  a  goodidea to track the EPS rank of your stocks on at least a weekly basisso you have a chance to make changes to your portfolio if there is adramatic change in the character of your investments.
• Rel.  Str.: Relative  Price  Strength.  Important: A  relative  strengthweighting  is  used  to  compare  one  company  to  another,  or  one  in-dustry  to  another.  This  IBD table  is  an  analysis  of  a  stock’s  pricechange relative to other stocks in the table over a 12-month period.When  buying  options,  I  focus  on  stocks  with  a  relative  strengthweighting of 80 or better, and 40 or lower when selling stock short.• Acc. Dis.: Accumulation Distribution Rating. Important: This indica-tor reﬂects the percentage change of a stock’s price and its volume,two  of  the  most  important  indicators  of  strength  or  weakness  in  astock. IBD uses the rating A (strongest) to E (weakest). I like to focuson As only for buying and Es only for selling stock short or taking abearish perspective on the stock.
• Vol. % Chg.: Percent Change in Volume. Important: This is an inter-esting addition to the table of information. IBD highlights stocks thathave prices greater than $10 when the volume increases by 50 percentor greater than the average volume over the last 50 trading days. Whyis this important? Volatility. Always look for large increases in volume.I look for increases that are at least double (200 percent) in average vol-ume because the larger the increase in volume, the more likely some-
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thing important may be happening. This is a typical signal of momen-tum  change,  which  indicates  strong  impending  moves  either  up  ordown in the price of a stock. 
Note: Look for stocks that are lower than $10 in price that have vol-ume percentage changes of 200 percent or greater. These could signalthe beginning of explosive growth in the price of a stock.
• Other table column headings include:
• 52-Week High.• 52-Week Low.• Closing Price.• Price Change.• PE Ratio: price-to-earnings ratio.• Float (mil): number of shares outstanding.• Vol. (100s): number of hundreds of shares traded on the session.
Investor’s Business Daily—Option Guide from Daily Graphs
This exceptional publication can help you spot stocks and futures with op-tions ready to make a big move. This periodical reviews every stock thathas options, complete with the related charts and graphs. This publicationand its online counterpart is worth its weight in gold many times over onceyou understand the risks and rewards associated with options strategies.
www.dailygraphs.comPhone: (800) 472-7479
DATA SERVICE PROVIDERS
As an investor or trader, you can access sources of information that pro-vide you with current data as to prices on stocks, futures, and options. Inaddition to prices, you can also receive up-to-the-minute news and marketanalyses. This information can be accessed in a variety of ways includingthe  Internet,  cable,  FM,  satellite,  and  wireless  networks.  Which  kind  ofservice you need depends on what kind of trading you are involved with.Real-time data is as close to the actual prices as you can get. As the priceschange  at  the  exchange,  the  data  is  transmitted  directly  to  you,  therebyminimizing  price  discrepancies.  Delayed  prices  are  typically  transmitted15 to 20 minutes after the prices have changed at the exchanges. End-of-day prices are transmitted at the close of the market each day. The fasteryou receive your data, the more costly it is to obtain; however, the level of
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accuracy can be a signiﬁcant contributing factor in the kind of trading youchoose to pursue.
eSignalProduct of Data Broadcasting Companywww.esignal.comPhone: (800) 322-1339
• Fundamental information on more than 150,000 stocks, futures, options,bonds, mutual funds, indexes, ﬁxed income, FOREX, and statistics di-rect from the exchange ﬂoors.
• Compatible with a wide variety of software packages.• Discrimination between day and night sessions.• Complete news stories to keep you informed of continual changes in
market conditions.
• Data is available via Internet.• Real-time, delayed, or end-of-day quotes 24 hours a day.• Stock  market  information  from  NYSE