This video is the first of a series of ten videos that we’ll be producing as cautionary warnings about the largest mistakes that options traders make and how they can rectify those mistakes. The first Options blunder we’ll cover in this video is about the disastrous consequences of getting cocky and sizing up too quickly as an options income trader.
View Video Transcripttoday’s video is the first in a 10 part
series that we’ve decided to produce for
traders who are really serious about
trading options for a living and taking
the proper steps at the proper pace to
seriously improve an Excel
I’m the head trader of SMB capitals
options trading desk and I can tell you
for many years of experience that the
pitfalls we’re gonna be describing in
these videos are real and if you’re
serious about trading for a living
you’re gonna take good notes and really
internalize the points we’re gonna be
raising if you’re actually serious about
changing careers and trading full-time
as an options trader then I urge you to
watch this series of videos that we’ll
be releasing over the coming weeks and
months so that you don’t fall by the
wayside like so many aspiring traders
who don’t want to spend the time to
learn the actual truth about the
challenges and rewards of trading
[Music]
hi I’m Seth Freiburg and I’m the head
trader of SMB capitals options trading
desk SMB capital is a proprietary
trading firm located in midtown
Manhattan and we provide capital for
options and equity traders from all over
the world trading both remotely and in
our offices here in New York City now
I’d like to suggest that you click on
our subscribe button right now so that
you don’t miss any of our free trading
videos that we produce for traders and
investors all over the world they’re
really very valuable ok so as I
mentioned we’ve assembled 10 lessons on
the realities of options trading and the
blunders that you have to avoid if
you’re serious about trading for a
living this is basically a series
focused on all sorts of foolish thoughts
that people have about options trading
all sorts of ridiculous blunders they
make and just how dangerous they really
are if you fall into any of these traps
you can cost yourself a great deal of
money or forego a great deal of
opportunity which is just as unfortunate
worse you could get so discouraged
that you’d quit before you realize that
you actually have a natural talent for
trading and that would be tragic
either way I’m urging you to take me
seriously today if for no other reason
than this these are not just some
principles that I’ve developed out of
theory or for some book these are actual
experience that I’ve had trading
personally and professionally in other
words I’ve made every one of these
mistakes myself and suffered the
consequences myself and so that’s why
I’m so passionate about helping all of
you to avoid these same mistakes and
have a much smoother ride to trading
success I honestly believe that these
videos are about the most important that
I can share with you I mean we could
talk about great option strategies great
setups trades with very high win rates
and high returns and all of that is
solid information but if you fall into
these traps that the market and your own
psychology has laid for you then all of
its gonna be for naught you will blow up
your account and never be able to trade
any of these strategies so what’s the
point so these are actually very very
important lessons that can mean the
difference between you’re actually
making it as a trader or flaming out
quickly
is you’re approaching the learning
process wrong
it’s your choice honestly okay so today
we’re gonna focus on the first blunder
that I’d like to share with you and that
is the foolish belief that you’ll trade
five hundred thousand dollars in capital
the same way that you currently trade a
five thousand dollar trading account I
mean it’s sort of obvious that that
statement is not true but many beginning
traders can fall into the trap of
believing that and here’s how it
develops now I want you to pay close
attention because if this sounds like
something you yourself have been
thinking you definitely need to watch
the rest of this video so here’s how it
goes it starts with someone who figures
he can get rich quick if he learns how
to trade or maybe he wants to quit his
job because he’s sick of it and bored by
it and he figures he’d have a lot more
fun trading options for a living so
that’s what he wants to do now getting
real about this you’re not going to get
rich quick trading it takes extensive
training you can get rich quick by
hitting the lottery but if you want to
build wealth properly over time you need
to understand that it will take time and
education and anyone who tells you
otherwise is not being straight with you
please believe me on this you can get
there but you need to do it the right
way so you can’t just go and quit your
job with the dream that you’ll be a
trading tycoon in a few weeks it does
not work that way you need to have a new
career or a new skill that you’ve
developed properly over a period of
education before you take a career risk
and quit your job prematurely so if any
of this sounds like you you really need
to keep listening to what I’m saying
here ok so let’s say that someone takes
a course an options income trading which
is something that we teach here at SMB
so his expectations are that hey it’s
called options income trading so if I
take this course it will replace my
income and I’ll just be able to pay my
bills each month and eventually start
buying expensive cars going on exotic
vacations etc if I just take this course
and do what they say after a few weeks
of intensive study I’ll be set for life
that’s because they don’t understand
that just because this practice is
commonly known as options income trading
it doesn’t mean that every trade will
produce income
for you what it does mean is that if you
develop the proper trading skills you
can produce a high enough return over
time that you can do this for a living
if you persist in your education and
professionalism we’ve got a floor full
of traders here at SMB to bear witness
to that fact ok so let’s take a
hypothetical guy who takes a couple of
courses in options income trading and
actually starts making some money
trading options that can easily happen
in fact when I first started trading
options I had this run of six months
right in the very beginning of my
trading journey where I was trading a
small amount of capital and crushing it
for six straight months before I had a
loss so you could get pretty cocky when
something like that happens so let’s say
our hypothetical guy is trading his
favorite monthly options income strategy
with five thousand dollars of capital
initially and let’s say that the trade
has a target profit of five hundred
dollars or ten percent of his capital
and it also has a stop a maximum loss
limitation of five hundred dollars for
every trade so the trade has a one to
one risk reward ratio which is actually
pretty good for options income trading
because of the very high win rate of
this practice now the reality is that
many times with this particular strategy
the trader will drawdown 400 dollars
during the course of the trade but
recover from that and make a profit or
even hit his $500 target profit let’s
say that that’s a common occurrence with
this strategy so since he’s trading a
$5,000 account he just sits there and
observes this unfold after all it’s not
a lot of money and he’s not too worried
about it because he knows that he’s back
tested the strategy and he’s paper
traded in it and he understands that
sometimes it’s going to draw down $400
before it makes a full recovery and
yields a great profitable result okay so
let’s say in this hypothetical case
after six months this trader is up a
thousand bucks on his $5,000 which is
very doable and options income trading
in certain markets so he’s up 20% on his
$5,000 in the worst drawdown that he
could have experienced during the entire
period was $500 so let’s take a
hypothetical six months so you can see
how he might have arrived at his $1,000
profit so in month one he was up he may
350 bucks that month and in month 2 he
made 500 bucks although you’ll notice he
drew down $400 before he ended up
hitting his $500 target profit in month
3 he got stopped out and lost 500 bucks
a month for he made $350 but not before
having drawn down $400 first during the
course of the trade in month 5 he lost
$100 and in month 6 he made 400 after
having initially drawn down $400 on the
trade so that’s how he got to his $1,000
profit after 6 months I want you to
focus on the months with the asterisks
you know there was three of those six
months so in those months he got drawn
down $400 at one point during the trade
but then ended up recovering and making
a nice profit and in the third month he
actually got stopped out at a loss of
$500 so now keep in mind that we’re
talking about modest losses of four or
five hundred bucks here and the guy’s
got $5,000 in his trading account but
let’s assume that he’s got much more net
worth than that so he’s not really
worried about that $400 so now this is
when the disaster happens and what is
that disaster it’s a thought that enters
this traders mind and he says to himself
well gee I made 20% on $5,000 if I had
traded $500,000 I’d be up a hundred
grand I could go out and buy that fancy
car and impress all my neighbors this is
crazy why am i trading $5,000 I mean I
made money for out of six months you
know I’m a great trader I’m up 20% just
six months I’m invincible I’m an ATM
machine as one of my ultimately
unsuccessful mentoring students once
told me so this is the moment of truth
or actually this is the moment of
falsehood this early success is
ironically one of the worst things that
it can happen to you as a trader as
you’re about to understand now before we
go any further before we explain exactly
why a disaster is about to take place I
did want to point out that while this is
a cautionary video intended to make your
expectations realistic about what’s in
front of you as a developing trader I
also would want you to know that we are
currently running a two-hour free
intensive workshop at the moment
where will be teaching you three
real-world option strategies that actual
professional options traders use
including a really simple but incredibly
effective strategy that some of the
greatest investors in the world like
Warren Buffett used all the time plus an
options trading strategy that has a
statistical 80 percent probability of
profit month in and month out plus an
option strategy that you can employ with
the stock that you like where you’ll
make your target profit whether the
stock goes up goes nowhere or even goes
down a small percentage so if those
strategies would be of interest to you
then you should check out the free
options class that we’re currently
running just go ahead and click the link
that should be appearing now at the top
right corner of your screen that will
open up the free registration page in a
new window so don’t worry you won’t lose
this video or you can just head on over
to options class com to register for
this free intensive workshop it’s a rare
opportunity for retail traders and
investors to learn directly from Wall
Street traders but that’s exactly what
you’ll be getting through this free
online workshop so click the link to
sign up now and don’t miss it ok so now
back to our trading example let’s just
say hypothetically the next month he
pours
foolishly five hundred thousand dollars
into his account and I’m telling you
I’ve seen this happen repeatedly to
traders who are first getting started so
he pours 1/2 million dollars into his
account and he starts trading the same
strategy with the same properties the
same likelihoods everything’s the same
except he’s now making a five hundred
thousand dollar trade as opposed to a
five thousand dollar trade so we’ve seen
that the trade in three of the first six
cases drew down four hundred dollars at
one point well when you’re trading a
$500,000 account then everything is a
hundred times larger than a five
thousand dollar account so a mid trade
drawdown of four hundred dollars before
becomes a mid trade drawdown of $40,000
with the new size well he’s not used to
seeing his account drawdown $40,000 the
biggest drawdown he saw before was five
hundred dollars in the month he got
stopped so what would have been chump
change to him on a five thousand dollar
account at the exact same level of
drawdown in other words what would have
been a
$400 loss at his original Capitol level
now produces a $40,000 drawdown meaning
he’s down 40,000 bucks but he’s not been
stopped as yet because his stop is now
50,000 so what happens I’ll tell you
what happens he hits the panic button
and his mind fills with doubt and fear
and he’s kicking himself he can’t
believe he got himself into this
situation and he closes the trade with a
$40,000 loss to relieve his anxiety and
fear well I want you to think about that
slide that I showed you before the first
six months of this traders journey where
he made money four out of six months and
produced a 20% return well look what
happens when he freaks out and panics
out of the trades because he’s trading
way too large for his experience level
and his current risk tolerance he ends
up losing 27 percent and losing $135,000
where if he had traded exactly the way
he was trading before with the $5,000
account there’s a very good likelihood
that had he not panicked out at the
$40,000 level on each trade which had
formerly drawn down only $400 had he
just maintained his former discipline
there’s a very good chance that he would
have recovered from those losses and
there’s no reason to believe at all that
he couldn’t have made the hundred
thousand dollars and the twenty percent
positive return that he made in his
first six months on the lower capital
level instead he ended up losing on five
out of six trades and panicking out of
each trade at a forty thousand dollar
loss as you can see ending up with a
disastrous outcome because of the shear
dollar amount of the drawdown the fact
is that he was not ready to trade that
sighs it was a wonderful idea
I’ll even admit it was a logical idea
unfortunately it was impossible to
implement in the real world where the
rest of us live it was impossible to
translate into reality because of the
psychological barrier of jumping from a
drawdown of four hundred dollars and
translating that into a drawdown of
thirty to forty thousand dollars in the
exact same trading situation just on a
greater level of capital now you may
think that you’re a robot with nerves of
steel and this wouldn’t happen to you
but I can assure you I’ve been trading
options for
long time I have never met anyone who
hasn’t failed miserably in this exact
scenario that person doesn’t exist so
how can we avoid this trap first of all
I want to say unequivocally that this
trap can be avoided and you can get to
the point where you will be trading
exactly the same as you were trading on
the smart capital level you just need to
know how to get there
we’ve got traders on our desk here at
SMB who regularly draw down 75 to
$100,000 intraday and make millions of
dollars a year trading for the firm so
you don’t have to fall into this trap so
the way to avoid this problem is by
understanding that sizing up your
trading account is exactly like weight
training one of the guys on our desk has
actually done extensive weight training
and he told me that you typically start
out lifting about say 50 pounds and if
you can do that consistently for a
little while you bump your weight five
pounds at a time
five pounds that’s a 10% increase and
when you get to a hundred fifty-pound
that’s a three percent increase we’re
talking about minor incremental
increases so you don’t injure yourself
this guy on our desk was able to build
up to five hundred pounds that’s a 1000%
increase but he did so very very
gradually over a number of years so your
start at a much lower level 50 pounds or
so and it’s not going to take you three
days it’s going to take a number of
years to get to 500 pounds and a lot of
discipline and study and skill risk
tolerance and muscle building have a lot
of similarities you’re not going to be
able to go from being able to tolerate a
drawdown of $400 to being able to
tolerate a drawdown of $40,000 overnight
you can get to the level where a 40,000
drawdown actually is no problem for you
you B may even get to the point where
you’re trading for prop firm like ours
trading a twenty million dollar account
at those levels you can easily get to a
point where that level would drawdown a
forty thousand drawdown is not something
that even bothers you psychologically
but you’re not going to get there if
your account is five thousand dollars
and you bump it to five hundred thousand
dollars without any interim steps at all
either if you increase your capital very
very slowly over time you can build up
that risk tolerance muscle and then that
statement that you could have made
$100,000 in six months can actually
become legitimately true and happens the
guys around here all the time you are
not going to get there all at once
everything about trading is a gradual
skill building process and in this case
it’s a gradual psychological risk
tolerance building process that takes
time if you try to rush it I assure you
you’ll regret it I am so positive that
you will regret it if you fall into this
trap that I’ve made this options trading
blunder number one because I think it’s
actually the most dangerous and
devastating mistake that people can make
and the reason it’s so devastating is
that some people never psychologically
recover from a series of losses like we
just showed you or just about as bad
they do recover from it but the
psychological scars that it creates
because they ramped up their capital
level too quickly in the beginning
affect their trading so deeply they
never really shake the fear created by
those situations that they weren’t ready
for and they permanently trade scared
which does not work if a trader is to
gun shy to take risky will never be
successful whereas if you had build up
your capital level gradually if you had
done it intelligently then you would not
be scarred psychologically by a
particular experience instead you would
slowly and gradually get more and more
comfortable and you’ll come to expect
that you will encounter temporary draw
downs of a larger magnitude and you take
them in stride instead of freaking out
instead you’d make money in months where
you drew down initially in many cases
and in the few cases where you got
stopped out you take that loss and try
to move on to the next month and in many
cases make the money back in short order
and proceed to experience the strong
returns that you expected so
understanding options trading blunt
blunder number one to repeat I’ll trade
five hundred thousand dollars of capital
the same as I currently trade five
thousand dollars is a crucial principle
for you to understand for your long-term
success as a trader if any of this is
familiar and you
just ramped up your account and you’re
feeling cocky about your trading please
stop everything and get in contact with
me if this video hasn’t succeeded in
talking you out of it I’ll personally
talk you out of it as a public service
because it’s that critical you’re never
going to be a successful trader if you
start out knocking yourself out of the
game psychologically in your early days
as a trader and that would be a shame
because this style of trading has such a
high winrate that if you just build up
your capital level gradually you have a
really good shot at reaping the rewards
you were seeking in the first place now
just to remind you as I said earlier if
you enjoyed this video and learn
something valuable from it and would
like to learn the details of three
real-world option strategies that
professional options traders use all the
time
then you should check out the free
options class that we’re currently
running just go ahead and click the link
it should be appearing now at the top
right hand corner of your screen that
will open up the free registration page
in a new window so you won’t lose this
video don’t worry or you can just head
on over to options class com to register
for this free intensive workshop it’s
really a rare opportunity for retail
traders and investors to learn directly
from Wall Street traders but that’s
exactly what you’ll be getting through
this free online workshop so click the
link to sign up now and don’t miss it
okay so now it’s your turn does any of
this sound familiar to you does any one
of our subscribers or viewers have a
similar story if you do please comment
below so that the others can all see
that what I’m talking about is the real
deal and something extremely important
that must be kept in mind and please
right now press on this subscribe button
because you’ll be notified as we
continue this important series that you
will keep you focused on all of the
important pitfalls that you need to
avoid to become a successful
professional full-time options trader
which for many of you is your dream
* no relevant positions
