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An analogy – Checkers is to buying stocks as chess is to trading options

Last week we saw the market fall for the fourth consecutive week.  Volatility in the options market shot higher than we have seen in many years.  As usual, there are abundant ways in the options market that do not exist in conventional investments.

For example, our Bearish SPY portfolio gained 17.5% last week while the market (SPY) fell by 4.5%.  This portfolio has now gained 42.3% over the last couple of months as the market has steadily gone down.

Today I would like to discuss a little about the challenges of learning a bit more about the options business.

An analogy – Checkers is to buying stocks as chess is to trading options

Someone said that investing in stocks is pretty much like playing checkers.  Any 10-year old can do it.  You really don’t need much experience or understanding.  If you can read, you can buy stock (and probably do just about as well as anyone else because it’s basically a roulette wheel choice in spite of the near universal belief that you are smarter than anyone else).

Options, on the other hand, is more like playing chess.  It can be (and is, for anyone who is serious about it) a life-time learning experience.

You don’t see columns in the newspaper about interesting checker strategies, but you see a ton of pundits telling you why you should buy particular stocks.  People with little understanding or experience buy stocks every day, and most of their transactions involve buying from professionals with far more resources and brains (and for some reason, these professionals are selling the stock to them instead of buying it).

Option investing takes study and understanding and discipline that the purchase of stock does not require.  Every investor must decide for himself or herself if they are willing to make the time and study commitment necessary to be successful in option trading.  Most people are not.

It is a whole lot easier to play a decent game of checkers than it is to play a decent game of chess.  But for some of us, options investing is a whole lot more challenging, and ultimately more rewarding.

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I have been trading the equity markets with many different strategies for over 40 years. Terry Allen's strategies have been the most consistent money makers for me. I used them during the 2008 melt-down, to earn over 50% annualized return, while all my neighbors were crying about their losses.

~ John Collins