Larry McMillan’s Trading Secrets

When trading options, use a model. Every single serious option trader uses a model to evaluate certain risk parameters of his option trading. If you’re not using one, then you are asking for trouble. The model allows you to gauge the risk of stock movement, or volatility changes, or time changes on your option price. The Black-Scholes model is widely recognized as the “standard” in this field. There are others, but Black_scholes is probably the easiest, best, and most prevalent. You can find a free model at www.cboe.com, or you can buy stand-alone versions for nominal prices (we sell one for around $100), or you can go top of the line and get ones that hook up to real-time pricing (which are more expensive, of course).

Trade all markets. By this I mean, trade stocks, indices, and futures. Whatever technical methods of analysis you are using to decide which stocks to trade, for example, can easily be applied to the other markets as well. Specifically, if you are trading options and you have a strategy that you like, that same strategy will work for futures, indices, or stocks. In fact, futures often present better opportunities than stocks.

Use follow-up methods. Don’t just put a trade on and forget it. Set a stop loss initially and stick to it. Then, if the position begins to profit, tighten your stop so that you lock in some percentage of those gains. This is called a ‘trailing stop,’ and it is the only way you are going to “let your profits run,” which is what you have to do when you get a terrific winning trade working for you.

Have some humility in your trading. Braggarts and showmen are often taught rude lessons by “the market.” Whenever I meet someone at a social or business function and he starts telling me about his winning trades, I know I’m not talking to a professional. Professionals, if they want to tell you about their trading at all, will more likely tell you about their losses (those are often better stories, anyway). Also, remember not to confuse brains with a bull market. That is, if you got lucky in a position because the broad market moved your way and carried your position with it, don’t feel that you are of superior intellect; you might get stung the next time.

Trade what feels comfortable. There are many systems, strategies, and techniques for making money in the markets. But not every strategy works for every trader or investor. For example, if your neighbor is making money selling out-of-the-money naked options, you might be tempted to try it yourself. But if you find yourself suffering through sleepless nights, worrying about the large — theoretically unlimited — risk of such a strategy, then perhaps that strategy is not for you. instead, find a strategy that is compatible with your psychological makeup.