Why I start LEARNING a NEW INVESTING STRATEGY : OPTIONS

During the past five years I invested a lot of free time reading different blogs and investment strategy books. Investing money and learning how to grow money is a passionate hobby besides all the other hobbies that I like to do. Growing your money should be a basic skill that everyone learns in his lifetime. Unfortunately that is not the case…95% of Belgian population does not invest in the stock market.

While I was learning different investing strategies and optimizing my own Investment strategy, I came to the conclusion that there are three types of investing or trading bloggers. The three types of blogs I frequently encountered, were people writing about their

1. Index investing strategy
2. Dividend (growth) strategy
3. Options strategy

There are investors that combine a dividend or index ETF investing strategy with an options trading strategy. Additionally there are numerous investors with their own website and subscription service promoting value stock investing, their expertise in a specific investment sector, or their way of investing. Some websites are transparent about their results, others remain vague.

Popular bloggers are people who did reach the financial freedom phase and retired early. They enjoy life by living from their dividends and are mostly conservatively invested. They are NO LONGER active investing in the market as they do not want to invest the time to do so. Other investors are blogging about their progress towards their financial independence goal. I consider them the most interesting group as they invest and trade actively the market to accelerate their path to financial freedom and growing their net worth.

Last but not least you have a lot of US people blogging how to get out of their (student, house, credit card,….) debt and their personal finance problems.

From all the above different groups of investors I learn the most from bloggers that are actively investing the market.

Reflection on my own Financial Strategy

If you have read my Financial strategy, you know that I am a dividend investor at heart. I keep on growing my dividend income portfolio and look always for safe (high yield) dividend paying stocks, ETFs or Closed End Funds. This is definitely my number 1 strategy going forward. However it also needs a lot of capital to reach my ultimate goal. So I reviewed many different ways to grow my cash flow income stream towards my dividend portfolio. I could invest in rental properties but the return of this type of investing is net 3%. It also needs a lot of time and capital.

When comparing the results of the different investment strategies, I became fascinated by the investors who were using options to invest in the market.

Options traders are able to generate a consistent passive income out of the stock market with a limited amount of capital. It becomes even more fascinating when investors combine a dividend income portfolio with an options trading strategy as supplement.

Another trigger that made me reflect on my investment strategy was the fact that the Belgian government raised again the dividend tax towards 30%. Within 5 years this dividend tax doubled from 15% to 30%. If you want to read more about it, read the following blog post “Who’s stealing our money? Watch out”

So I decided that I can’t rely on just ONE CUTTERS’ KNIFE to slice dividend income out of the stock market. Now I will develop a toolbox of investment strategies. Going forward options trading will be part of my toolbox. Decision made…that will be my next focus.

So what’s next you may think….

My 3 main reasons for learning Options Trading

Besides the reasons explained above related to my investment strategy I want to explain and clarify to you three other key reasons why I want to learn options trading.

Reason 1 : One directional trading versus multidirectional trading

During the past 20 years I have been investing in the stock market. I was a BUY and HOLD investor for a long time (during my novice years, I would say) and learned the hard way that buying ONE stock can result in ONE BIG losing money trade. It can go to ZERO and you can lose all your money. It happened to me twice during my 20 years of investing. When you buy a stock, you buy this stock because you read the financial statements, you believe in the growth strategy and you think the stock price can only go upwards. Or you may have other reasons why you buy this company or ETF or fund…

Stock positions, whether long or short, have directional bias because they rely on movement in one direction for profits. Options allow you to reduce directional bias by creating combination positions that can profit if the underlying moves up or down.

So not only can you better control maximum losses with options, but you can also reduce directional risk by using strategies that can gain from two of three possible directional moves. Such approaches are based on delta neutral trading styles which introduce a whole new way of thinking about the market.

With options trading, you can also trade multidirectional. This means that you can enter long, short but also neutral trades. This opens a lot more possibilities with strategies to trade the market.

Reason 2 : Risk Management

Risk management is an important factor when investing in the stock market. How many people would know the risk reward ratio and their trade plan when investing in the stock market? What is the risk they are taking when they invest 5000 Euro in one company? How much capital can they lose?

With options trading you can use leverage to reduce your risk. You can enter an options trading strategy with a clear defined maximum loss. When you buy a stock of a company and it tanks because of a corruption scandal for example, you lose instantly money over night. Limiting your risk is more difficult when you trade stocks and I don’t see many stock investors hedge their stock positions with options.

Reason 3 : Return on Capital

Stock trading is very capital intensive. When you apply a dividend growth investing or value investing strategy, it requires a lot of capital employed to generate capital gains or dividends.

With options you don’t need so much capital to invest into a trade while you can clearly define your risk and profit. There are also different exit strategies if a trade goes against you.

When I reviewed the options income of different bloggers, the conclusion was that they generate the same amount of passive income as I do with my dividend investing strategy but with less capital in use and with less risk dependent on the strategy that they use.

 

What have I done so far?

When I take a decision to invest in my education, I always define a clear action plan. I will never dive in a pool without being able to swim… Learning how to trade options is a difficult journey with new terminology and many different ways to use options strategies within the stock market. A new world has opened for me since the day I decided to learn how to trade options.

So here are the three actions that I completed so far….

Action 1 : Start to learn the basics

During the VFB Technical Analysis day, I attended an investment strategy session of Maarten Redant, a Belgian options trading expert. I learned about his Options Trading strategy when I visited the VFB Technical Analysis Day in march 2017. You can find here the link to my blogpost VFB Technical Analysis Day : What did we learn?. 

When Maarten organized an options seminar for beginners, I immediately entered my subscription. During a full day I learned the basics of options trading. A very insightful day. The foundation of my options trading education was made…

Action 2 : Option Alpha education plan

Another experienced options trader is Kirk Du Plessis. Kirk runs the website of Option Alpha which is focused on educating options traders. You can find different options trading education tracks and a ton of material to teach yourself. You can also buy and subscribe to his membership if you want more.

I enrolled in the education program and also started the 8 week fast track program. See here the URL for my weekly schedule : www.optionalpha.com/fasttrack

Action 3 : Open an Options Trading Account

The last action that I have completed now, is to open an options trading account with Interactive Brokers. The advantage of Interactive Brokers is that they offer a paper trading account where you can practice.

Kirk Du Plessis recommends in his podcasts that when you start trading options, you need to trade a lot. Practice by doing is the only way to learn from mistakes.

 

My action plan going forward

 My action plan consists of three important steps towards success. 

Step 1 : Listen and Learn

So in order to maximize my learning track, I looked at all the unused moments in a day that I could use to maximize my learning time. So I created a 3 step approach for each week : Listen -> Read -> Learn

I identified three moments :

1. My commuting time to and from work by car. 35 minutes go and back results in 70 minutes of time. When there’s a traffic jam, this time can increase towards 1 hour or more.
2. My lunch break. Last year I was always eating my lunch at the canteen and chatting with my colleagues. This is also 30 minutes a day.
3. My travel time : As I travel for business frequently, I spend a lot of time in airports and airplanes. Today I am writing this blog post while sitting on a plane to China. People around me are either watching movies, reading a book or sleeping.

So when I look at the above time, I can study options trading at least 1,5 hour per day without sacrifying family time nor my time to complete my tasks for work. That results in at least 1 FULL day per week. Additionally I can study several hours while travelling.

So since a few weeks I listen every day to the podcasts of Kirk Du Plessis of Option Alpha in my car. I listened to 20 podcasts so far. Great educational stuff! I don’t complain or stress any longer when a new traffic jam slows down my road trip to work. I don’t listen to the radio any longer to all the bad news that gets broadcasted. Nor do I stress any longer because of road lunatics…

During lunch break at work, I don’t waste time anymore with chit chat (sorry colleagues…) but I maximize my time studying and watching training videos.

When I travel for business, I review the show notes of the podcasts, summarize my learning in my notes or read some chapters in PDF e-books about options trading.

Step 2 : Focus on the process

When I learn something new, I always focus on the process. What do other traders do? How do they execute the trade? What are they looking at? What is their thinking process and what are the different steps that they apply before entering a trade?

Hereby I focus on learning the strategies from traders that generate a consistent passive income. I subscribed to different Youtube channels. There are numerous options traders out there that share openly their knowledge and their thinking process. Subscribe to our newsletter if you want to know which channels we follow.

When the options trader uploads a new video at YouTube, I automatically get an alert message. As a result I gained a lot of knowledge in a very short amount of time.

A great summary of the process can be found in one of Kirk’s training videos of Option Alpha.

Step 3 : Achieving the right mindset

Throughout the years I learned that each different investing strategy comes with a different and specific mindset. A value investor thinks differently than a dividend (growth) investor. An options trader thinks differently than an index ETF investor.

This different mindset impacts the decision making on :

• The strategy applied for the trade (Knowing what conditions to consider when analyzing a trade and recognizing trading rules and requirements for the security)
• The chosen position sizing (Using proper trade mechanics when creating a position)
• The risk reward ratio (Understanding what makes the position gain and lose value)

If you don’t know what I am talking about when I say risk reward ratio and position size, I strongly recommend you to invest in your education. These concepts are basics for any investor for any strategy that you apply within the stock market.

So going forward I want to learn the RIGHT MINDSET to execute the process for high probability profitable options trades.

My first objective

If you have read some past blog posts, you know I always follow a methodological approach for reaching my goals. My first milestone is finish my fast track 8 weeks learning program. If I can master this program in depth within the next 10 weeks (End of August) besides my busy job, I will be a satisfied man.

My second milestone in my options education track is make profit in my paper trading account and learn how to deal with losing trades. It doesn’t make a difference whether you start with 1k, 5k or 20k if you can’t be a consistent profitable trader with a small account. I once heard an expression :

“You will never catch the BIG FISH, if you can’t catch consistently the small fish….”

So my first objective by the end of the year is to start with 1k in my paper trading account and practice as much as possible. By the 1^st of September, I hope to start paper trading within my account with a focus on a few specific strategies applied by other successful traders. The goal is to be profitable within my paper trading account first. Take out the emotions and apply a logical process with high probability of success.

Final conclusion

Why am I doing all this effort you may wonder? Well the reasons for investing in my own education are twofold.

The first reason is very simple…creating a lifetime skill for growing my money

I want to obtain a lifetime skill which allows me to generate a consistent passive income with a defined risk reward ratio.

Do you know the difference between middle class and wealthy people? Take a good look at below image…

On the left side, you find the middle class. People earn money and then save it on a savings account or they spend it. On the right side, you find the wealthy people who look for different ways to accelerate the growth of their net worth by optimizing their taxes and expenses while growing their income streams within different asset categories. Options is one of those passive income generators.

I will treat this as a profession going forward. My learning track for my dividend investing strategy took almost 4 years to master. With a strong dedication and focus, I am sure I can reach the goal where I want to be in the future…

Do you think an engineer or doctor learned his profession quickly? No, of course not..well…learning how to invest in the stock market with options is exactly the same. If you are serious about growing your money, you need first the right education, secondly the right mindset and last but not least the experience over time to reach your objective. This is not a “Get quick rich game” but a marathon to learn a new lifetime skillset to generate money out of the stock market. It could take me several years to reach my goal but when I do, I will be able to execute over and over again as I believe I will become 100 years old…hahaha…at least I hope so! I see myself trading options in the pension home…hahaha….generating money for my kids, grandkids and most importantly lovely wife.

Throughout the year I will write blog posts about my progress in my learning track. Keep on following us on Twitter and Facebook so you don’t miss any blog posts. Subscribe to our newsletter in the blog posts section.

I end with a final great quote. What new investing strategies are you learning? Let us know…

Thanks for reading !