Why Options Trading Won't Work

I have taught myself all forms of Technical and Fundamental analysis methods over the years. As you have seen in this blog, I am particularly interested in Elliott wave analysis. It is no secret that I am very familiar with all sort of strategies, including my own, the Sarmiento System. All stocks that have entered long-term rallies have, at some point, jump in high volume and more than 5% in value. One may be selective, training oneself to recognize "the catalyst" or reason why a stock would jump, and select the most likely candidates. However, you still are at the mercy of the markets, and unless you can see the future, no amount of Technical Analysis can prepare you for the surprise an earnings report may bring.

In the late 90's, it was easy! just buy a call and sell it when it has doubled in price. That could happen in days, or even hours in some cases. But that was then, and this is now. My Elliott wave analysis has brought me to the conclusion that the rally from 1987 to 2000 was a double zigzag, and that the decline to October 2002 was also a double zigzag. It follows that the current fake bull market (as I would like to call it) is also a double zigzag. This double zigzag may have concluded or may be close to conclusion. My point is, because we are in a bear market, it is only natural to find a selective list of stocks performing very nicely, but most stocks correct strongly, after brief bull runs. It follows that stock picking is a dangerous game in this environment. It is not surprising that most options trading have met frustration and self doubt.

Francis Bacon said :"If a person will begin with certainties, he will end in doubts, but if he would be content to begin with doubts, he will end in certainties"

I began a journey in Sept. 2002, at what turned out to be near the bottom of the market, searching for an options' strategy that would allow me to apply a capital that I had accumulated over years of hard work, to conservatively grow my portfolio in any market, despite the possibility that the bear market would continue for years to come. I realized I had more doubts than certainties at the time. I believe I am closer to the certainty I set out to find.

I have tried everything I could find about options and options strategies. I have come to believe that there is little I could learn from professionals and Gurus. There are few strategies that I have not already tried, using real money, paper trading and back testing, using some very expensive software, you have seen me use. Inevitably, the only constant I have found is doubt and the only certainty is random results. I also believe that there is no such thing as LUCK but rather success is what occurs when preparedness meets opportunity. Hence I have prepared, so I can substitute my days of doubt sprinkled with faith for days of faith sprinkled with doubt. Success is at hand because I have toiled, and my doubts are fewer and fewer.

Indeed, the certainty of random results, even in the face of carefully considered variables when entering a trade can only be reasonably endured with the use of probabilities. It is my job, I believe, to prepare for every contingency and only consider myself successful when the majority of my trades have returned me some gains. Not necessarily big gains, only some gains. I do not aspire anymore to obtain large percentage gains in each trade. I don’t even aspire to have a large percentage of my trades win, I only aspire to have an overall positive performance in my portfolio. I have come to understand that I can only win if I set aside my doubts and just plunge in the adventure that is trading hoping to succeed with the large basket of knowledge and experience I've acquired that would only help me reduce the probability of failure. It is critical that I understand that I can and often am wrong, no matter what amount of analysis and evaluation I make, I do NOT know the future. I can only prepare to make the right decision at the right time with the certainty that I will be wrong often.

I have learned the Elliott wave as the panacea. As though it was the crystal ball that it is not. Yet, one needs to realize that it is a method to increase the probability of success, but not the only route to success. One needs to be hedged to prevent rapid loss. However, I am convinced that no amount of hedging will save you every time. I was told once that you can use different options strategies, such as long calls, bull call spreads, calendars and the more sophisticated PCCRC’s. You may even learn to recognize the best situations in which to apply them but invariably you will find that you cannot prevent loss. In the end, all that was accomplished, you will come to understand, is that you merely shifted risk from one Greek to another, but the risk is always there.

Recognizing these facts are painful because we have been told that options is the way to easy money. Since I have not made easy money, I could conclude that there is something wrong with me. Yet, since I am fairly well educated, I doubt very much that there is something wrong with me. I opened this blog to find like-minded traders from whom I could learn and exchange ideas. I have come to realize that, while I am not alone, I am not at the bottom of the pack. I have come to understand that I have mastered what is there to master, but in the end, the most money to be made with options is probably in the business “education”, not in the business of trading. Don’t be alarmed, I don’t intend to start a seminar business, I am happy with sharing what I know with no strings attached. I am hoping to continue to learn from others and apply what I have learned in some form here.

What is quite clear to me, is that one needs to focus in one strategy in particular, and try to apply that strategy, learn it well thus increasing the odds of success. The PCCRC has been profitable for me, particularly in stocks that break out to new highs. Ironically, I have made money to the up side as well as to the down side (I told you, the only certainty is that you will have random results). After several years in this journey, in the middle of an erratic bullish run in a bear market, I have learned the PCCRC well, and the Sarmiento System as a method to pick candidates at any time, in any market. If such candidates are not forthcoming, I can simply keep my hard earned money safe in cash.

Anyway, this is my recipe for success, but don’t let anyone tell you that somehow this is easy to learn or implement. If you don’t think that you have the time or will to put the necessary effort, you are probably better off looking for a day job.

Juan Sarmiento