proﬁt and loss exits aheadof time, emotions can be pushed aside when this selling point is reached.
QUESTIONS AND EXERCISES
1. How much time should a new trader take paper trading a new strategy?
A. None—just jump right in with real money.
B. One trade.
C. One week.
D. At least three months.
2. Using  ______________,  traders  have  the  opportunity  to  maximizeproﬁts  and  make  consistent  returns  without  the  need  to  predictmarket direction.
A. Vertical spreads.
B. Delta neutral strategies.
C. Covered writes.
D. Ratio spreads.
3. Ultimately, only ______________ can take care of your money.
A. Your broker.
B. A ﬁnancial guru.
C. You.
D. The IRS.
4. A  directional  trader  has  to  be  right  about  which  of  the  following 
assessments?
A. Direction.
B. Magnitude of the move.
C. Time frame of the move.
D. All of the above.
5. True or False: Understanding volatility is one of the most important
components of becoming a successful options trader.
6. Which one of the following strategies would not ﬁt a scenario of low
volatility with a bearish bias?
A. Buy put.
B. Bear put spread.
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C. Buy ITM call.
D. Bull put spread.
7. ______________ is merely another way of expressing a driving need
for perfectionism.A. Fear.
B. Lying to yourself.
C. Greed.
D. Poverty consciousness.
8. Which of the following is/are key for a trader to become successful
trading options?
A. A bargain-hunting instinct with the ability to identify undervalued
and overvalued options.
B. A sound and well-designed game plan that provides consistentaction over time and that prospers in all market conditions.
C. The discipline to follow the game plan.
D. All of the above.
9. What are the three questions every trader should ask before getting
into a trade?
1. _________________________________________________________
2. _________________________________________________________
3. _________________________________________________________
MEDIA ASSIGNMENT
By now you should have a good understanding of what is needed to be-come  a  successful  options  trader.  Take  the  time  to  write  down  thethings  you  have  learned  from  this  book  and  review  these  discoveriesfrom time to time. In addition, choose a few strategies that have caughtyour interest and start paper trading them. If you haven’t already doneso, start a trading journal to track the details of each trade, as well as todocument  your  thoughts  along  the  way.  Hopefully,  this  book  has  pro-vided  some  tangible  insights  about  how  to  trade  options  successfully.Now it’s up to you to take these ideas and integrate them into your trad-ing plan.
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1. How much time should a new trader take paper trading a new strategy?
Answer: D—At least three months.Discussion: Each  trader  will  have  his  or  her  own  time  frame  that  isneeded  to  paper  trade  a  new  strategy.  However,  most  traders  shouldspend at least three months testing a new strategy. A longer amount oftime might be necessary if a strong understanding of the strategy is notachieved within three months. Nonetheless, eventually a trader needsto bite the bullet and test these strategies with real money. The key is tostart small and build up the amount you trade as your expertise grows.
2. Using  ______________,  traders  have  the  opportunity  to  maximizeproﬁts  and  make  consistent  returns  without  the  need  to  predictmarket direction.Answer: B—Delta neutral strategies.Discussion: Delta  neutral  strategies  help  take  some  of  the  guess-work  out  of  trading  options.  Trading  directional  strategies  can  beproﬁtable, but the move must be large enough in the predicted direc-tion and within a certain time period. The key to long-term success inthe options game is to make consistent returns. It’s nice to hit a homerun  now  and  then,  but  the  consistent  base  hitter  tends  to  have  thebest results all told. Delta neutral trading enables investors to makemoney  regardless  of  market  direction—a  revolutionary  approach  intoday’s volatile markets.
3. Ultimately, only ______________ can take care of your money.
Answer: C—You.Discussion: Too many traders have found out that listening solely toa  broker  or  ﬁnancial  guru  is  detrimental  to  their  trading  accounts’health. Though we can learn from brokers and various web sites andnewsletters, we are the only ones who really care about the successof our trading accounts. It might seem easier to rely on stock and op-tion  selections  from  someone  else,  but  when  things  go  wrong,  youneed to take responsibility and learn from your mistakes.
4. A  directional  trader  has  to  be  right  about  which  of  the  following
assessments?Answer: D—All of the above (direction, magnitude of the move, timeframe of the move).Discussion: All three of these assessments need to be right in orderfor a directional trader to see proﬁts. This doesn’t mean directional
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trading can’t be proﬁtable, but delta neutral trades are often easierto proﬁt from because they do not need to see a certain market di-rection. Ultimately, it is the disciplined traders who are successful,regardless of what strategies they implement.
5. True or False: Understanding volatility is one of the most important
components of becoming a successful options trader.Answer: True.Discussion: Too many new traders believe that their experience in thestock market will transfer over to success in trading options. Though itis important to have a basic understanding of the stock market, includ-ing  technical  and  fundamental  analysis,  options  do  have  additionalconcepts  that  need  to  be  learned.  Mainly,  if  we  do  not  trade  optionswith the appropriate implied volatility for the given strategy, losses canoccur even when our analysis of the underlying stock is correct.
6. Which one of the following strategies would not ﬁt a scenario of low
volatility with a bearish bias?Answer: D—Bull put spread.Discussion: A bull put spread is a credit strategy that is bullish in na-ture. When volatility is low, we normally want to be the buyer of op-tions. Though the bull put spread uses puts, it is a bullish strategy anddoes  not  ﬁt  a  low-volatility  market  with  a  bearish  bias.  Any  tradeshould be viewed in a risk graph before it is entered to get an idea ofwhat risks there are to the trade and if your expectations will createan appropriate proﬁt.
7. ______________ is merely another way of expressing a driving need
for perfectionism.Answer: C—Greed.Discussion: Perfection has become a driving standard for many peo-ple, given the high expectations and competitive nature of today’s so-ciety.  However,  perfection  is  impossible  to  achieve  in  the  tradinggame. The successful trader is disciplined and unafraid to take a losswhen needed or to take a proﬁt even if it isn’t at the apex of the possi-ble gain. Option traders are going to have losses, even when they doeverything right. However, it is the disciplined trader who is able toget rid of the emotions of greed and fear who is successful.
8. Which of the following is/are key for a trader to become successful
trading options?Answer: D—All  of  the  above  (a  bargain-hunting  instinct  with  theability to identify undervalued and overvalued options, a sound and
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well-designed  game  plan  that  provides  consistent  action  over  timeand that prospers in all market conditions, and the discipline to followthe game plan).Discussion: All three of these elements are key for traders if they wantto be successful. As a trader, you need to understand if an option is un-der-  or  overvalued  in  order  to  enter  the  best  reward/risk  trades.  Youalso need to have a plan set up in advance, so that emotion does nothinder  your  decision  making  process.  Finally,  try  to  develop  tradingdiscipline so that you have the courage to stick to your trading plan.
9. What are the three questions every trader should ask before getting
into a trade?Answer:
1. What is the market entry?
2. What is the proﬁt exit?
3. What is the loss exit?Discussion: Before you enter any trade, you should have a set entrypoint and exit based on proﬁt and loss. Just like an airline ﬂight atten-dant who tells passengers where the exits are before takeoff, a tradershould  have  a  similar  plan.  Emotion  is  the  major  obstacle  for  bothnew and experienced traders, and having preset entry and exit pointshelps alleviate a large amount of emotion-based uncertainty.
FINAL WORD
Regardless of whether you decide to trade stocks, futures, options, or allthree,  there  are  certain  characteristics  that  all  successful  traders  pos-sess. These attributes are very important for any trader to acquire if heor she wants to make it in this business over the long haul and continu-ally bring in proﬁts.
The ﬁrst characteristic and probably the most important is discipline.It is absolutely paramount that a trader has full control of his or her emo-tional state of mind to be successful at trading. Discipline allows the traderto be more objective and enhances the capacity to identify an opportunity.In addition, it provides the trader with the necessary conﬁdence to refrainfrom taking action because many times traders feel they must always be in-volved in the markets. Knowing when to stay out is as important as know-ing when to take advantage of an opportunity. This all requires self-control,discipline, and the courage to pull the trigger at the appropriate time.
Next, a good trader needs to be persistent. This means a trader should
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never take losses personally. Instead a determined trader will attempt tolearn  from  prior  mistakes  and  persist  in  developing  successful  trades.This is a ﬁne line, however, because although it is important to learn frommistakes  and  admit  when  you  are  wrong,  it  is  also  important  to  knowwhen not to quit. This type of mentality is also vital when searching for atrading methodology best suited to your style.
Patience is another critical attribute. Many times the trader must waitfor the right opportunity versus acting on the wrong ones. Since there aremany incorrect actions one can take in the market, it is important to waitfor the right opportunities. Many traders are fearful of missing somethingif they are not always in the market. The patient trader has the conﬁdenceto wait for the correct opportunity to present itself.
Another  key  attribute  a  good  trader  must  possess  is  the  ability  tothink independently. Most successful people in any business are indepen-dent thinkers. This often requires going against the crowd and establish-ing a point of view different from the norm. This can be uncomfortable formany  people.  As  a  trader,  it  is  important  to  ﬁlter  out  the  opinions  offriends, associates, and brokers. Trading strategies and the actual execu-tion  of  trades  involve  a  singleness  of  purpose  and  ﬁrm  resolve.  That  iswhy it is so essential for a good trader to develop independent thinkingand avoid the herd mentality.
Contrary thinking is also an important characteristic. People have ahard time going against the crowd. Cultivating the art of contrary think-ing allows the trader to take actions that oppose the majority. This is im-portant because (generally) the majority is wrong and public losses arecommonplace. So it is essential to be able to evaluate what the crowd isthinking and have the courage to take an independent approach to themarket.  Contrary  opinion  will  also  help  the  trader  avoid  being  trappedwhen panic takes hold of a market. In this way, a good trader will be ableto  take  advantage  of  the  emotional  extremes  in  the  market  and  proﬁtfrom them.
Good traders must also be truthful with themselves and accuratelyassess  their  strengths  and  weaknesses.  This  is  rarely  easy  and  is  spo-radically done by most traders. However, recognizing the truth is a keyrequirement for achieving success as a trader. A good trader must con-tinually engage in a process of self-reﬂection. Learning to take an hon-est  inventory  of  your  own  motivations,  priorities,  and  actions  willenable  you  to  accentuate  your  strengths  and  work  on  the  weaknessesthat make you vulnerable in the market.
A dedicated trader must be able to act quickly and ﬂawlessly executehis or her trading plan. There is a clear and important distinction betweendeveloping a sense of urgency and acting impulsively. A good trader wantsto constantly pay attention and be poised to take action without being too
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spontaneous or whimsical. The market can move very fast at times, so it isimportant not to get overwhelmed by indecision and fear. Otherwise thetrader  gets  a  sense  of  paralysis  and  no  action  will  be  taken.  It  is  notenough to be in the right place at the right time; you must also be able totake correct action.
These  key  attributes  have  to  be  part  of  a  trader’s  skill  set  for  thetrader to be successful over the long term. I encourage you to review thepreceding paragraphs as your trading career progresses. Continually try-ing to improve in all these areas is a lifelong commitment. Your efforts aresure to be well rewarded in the form of future trading proﬁts.
Good luck and great trading!
GEORGE A. FONTANILLSMiami Beach, FloridaDecember 2004
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