Make Money Trading Options

Make Money Trading Options Plot Summary

Introduction

Trading in volatile markets can feel like sailing through a tempest—waves crash against your vessel as uncertainty looms on every horizon. Many traders freeze in fear during market turbulence, watching helplessly as their accounts suffer. Yet within this chaos lies extraordinary opportunity for those prepared to navigate the storm. The most successful traders don't merely survive market volatility—they thrive in it, using strategic approaches to transform what scares others into their greatest advantage. Throughout these pages, you'll discover how to reframe your relationship with market volatility. Rather than something to fear, you'll learn to recognize volatility as the very mechanism that creates outsized profit opportunities. The difference between traders who consistently succeed and those who repeatedly fail isn't about innate talent or special access to information—it's about preparation, discipline, and having proven systems that function precisely when markets become most unpredictable. By mastering the practical frameworks outlined in the coming chapters, you'll develop the confidence to act decisively when others panic, positioning yourself to capture profits that remain invisible to the untrained eye.

Chapter 1: Set Up Your Test Trading Laboratory

The journey to trading mastery begins not with placing real trades, but with creating your testing environment. A test trading laboratory is your personal market simulator where you can explore trading strategies without risking actual capital. This controlled environment allows you to gather vital market intelligence while developing your skills in a consequence-free zone. Sam, a retired teacher with substantial IRA savings, exemplifies what happens when this critical step is skipped. After watching his nephew make impressive options profits, Sam read a single book on options trading and jumped straight into trading with real money. Within his first week, without any paper trading practice, Sam had lost nearly $40,000—more than 27% of his retirement account. His story illustrates the danger of entering the market without proper preparation and testing. The difference between Sam's approach and successful traders is striking. Professional traders treat the market like scientists approach experiments—with meticulous preparation and controlled variables. They use simulated trading accounts at brokerages like TD Ameritrade's thinkorswim platform, where they can practice with paper money before committing real capital. These virtual environments replicate real market conditions but remove the emotional pressure that often leads to poor decision-making. Setting up your test laboratory requires specific steps. First, establish a paper trading account with your broker or through platforms like Investopedia's simulator. Next, create a focused watchlist of 80-90 liquid stocks priced at $50 or higher. Each morning before market open, scan this list for stocks that have moved up by at least one point or one percent in pre-market trading. This preparation ritual takes just 10-15 minutes but provides invaluable data on potential trading opportunities. Your laboratory serves multiple purposes: it helps identify consistently winning stocks, validates your trading strategies, and trains you to recognize dangerous market conditions when you should stay on the sidelines. Most importantly, it builds the muscle memory of disciplined trading before real money enters the equation. Remember that testing isn't just for beginners—even experienced traders continuously test new ideas. The market evolves constantly, and your laboratory provides the perfect environment to adapt your strategies accordingly without the emotional interference that comes with real trading.

Chapter 2: Follow Winners, Not Your Emotions

Trading success depends less on predicting the market's next move and more on following what's already working. Rather than attempting to forecast price direction—a strategy that fails most traders—the winning approach involves identifying stocks already demonstrating strength and aligning your trades with these established winners. Consider the racetrack analogy from the book: at a horse race, you must place your bet before the race begins, but imagine if you could bet after seeing which horses take an early lead. In trading, you actually can "bet" on stocks already showing strength. This is precisely what John, an options trader who consistently outperformed the market, did. Instead of trying to predict which stocks would rise, John identified stocks already moving higher in his paper trading account and followed them with real money only after their upward momentum was confirmed. When John first began trading, he lost money trying to predict reversals. He would see a stock rise and immediately assume it would soon fall, placing bearish bets that repeatedly failed. His transformation came when he realized the market rewards those who follow strength rather than fight it. By waiting for confirmation in his test trading account first, then placing small "probe" trades of just one or two option contracts, John could verify the trend's strength before committing larger capital. The practical implementation involves several steps. First, identify stocks showing at least 1% gains in pre-market trading. Then purchase small paper positions of these stocks in your test account. After the market opens, monitor which of these positions continue gaining strength—these are your potential winners. For stocks showing persistent strength, place a small "probe" of five call options in your test account. If this probe remains profitable, consider adding five more calls as further confirmation. This methodical approach eliminates emotional decision-making by relying on observable data rather than hunches or predictions. It also prevents the common mistake of "chasing" stocks that have already made extreme moves, as you're looking for sustained strength rather than dramatic spikes. Remember that following winners doesn't mean blindly buying anything that moves higher. The key distinction is confirming strength through multiple stages of testing before committing real capital. This patient, methodical approach will keep you on the right side of market momentum while others get whipsawed trying to predict the unpredictable.

Chapter 3: Master the Art of Market Behavior Analysis

Beyond individual stock movements lies the broader market environment that influences every trade. Successful traders develop a sixth sense for market behavior patterns—recognizing signature formations that repeat day after day. While traditional technical analysis relies on complex indicators, Market Behavior Analysis offers a simpler, more intuitive approach to reading market conditions. Bradley, a veteran trader featured in the book, suffered substantial losses early in his career by placing trades without first assessing overall market conditions. "I was like a pilot taking off without checking weather conditions," he admitted. His trading transformed when he began categorizing market behavior into specific patterns that signaled whether conditions favored trading or standing aside. Bradley identified recurring formations like the "Bullish Steamroller" (a powerful uptrend that builds strength throughout the day) and the treacherous "Rocky Road" (a chaotic pattern with no clear direction). Bradley's approach involved checking the one-minute chart first thing each morning to identify which behavior pattern was emerging. On days when he recognized the "Bullish Steamroller" forming, he confidently bought calls on leading stocks, knowing the market's powerful momentum would likely continue all day. Conversely, when he spotted the "Rocky Road" pattern with its unpredictable price swings, he stayed completely out of the market, preserving capital while less observant traders got chopped up in the volatility. To implement this approach yourself, start by examining the market's opening behavior on a one-minute chart. Look for signature patterns like the "Steamroller" (powerful, building trend), "Spike Up" or "Spike Down" (extreme moves likely to reverse), "Sideways Sucker" (tight, consolidating range), or "Rocky Road" (chaotic, directionless action). Each pattern provides vital clues about how to approach that particular trading day. This analysis should be performed alongside your test trading strategy. The behavior patterns you identify should confirm what your test trades are showing. For instance, if your test account shows multiple stocks gaining strength while the market displays a "Bullish Steamroller" pattern, you have powerful confirmation for taking bullish positions. Remember that some market conditions are simply untradeable. The "Sideways Sucker" and "Rocky Road" patterns typically signal days when even experienced traders struggle to profit. Learning to recognize these dangerous conditions and stand aside is just as important as identifying favorable trading environments.

Chapter 4: Trade Small to Win Big

The counterintuitive secret to consistent trading success isn't maximizing position size on every trade—it's deliberately keeping positions small enough to maintain emotional equilibrium. Trading small creates the psychological space needed for clear decision-making while providing the flexibility to survive inevitable mistakes. Sam's catastrophic trading week perfectly illustrates the dangers of excessive position sizing. As a new options trader, Sam immediately purchased 10 Apple call contracts, spending over $22,000 on his very first trade. When market conditions shifted, he added 20 SPY puts worth nearly $30,000. Within days, Sam had committed almost his entire retirement account to options positions he barely understood, ultimately losing 27% of his life savings in a single week. The alternative approach is demonstrated by traders like Marcus, who never risked more than 2% of his account on any single trade. When Marcus identified a promising setup, he would first place a single options contract as a "probe." If the trade moved in his favor, he might add a second contract, but never more than five contracts total regardless of his conviction level. This disciplined approach allowed Marcus to test his market thesis without the emotional pressure that comes with oversized positions. Implementing small position sizing requires specific steps. First, establish a maximum dollar amount you're willing to risk per trade—typically 1-2% of your total account. For a $10,000 account, this means risking no more than $100-200 per trade. Next, determine how many contracts this allows based on your stop-loss placement. If you're risking $50 per contract with a $200 maximum risk, you would trade no more than 4 contracts. Position sizing discipline must extend beyond individual trades to your overall exposure. Limit your total account risk to no more than 5-6% across all positions. This means that even if every position hit your stop-loss simultaneously, you'd only lose a manageable portion of your capital. Remember that small position sizing isn't about limiting profits—it's about creating the conditions for better decision-making. When you're not overwhelmed by the financial and emotional impact of each price tick, you can follow your trading plan without interference from fear or greed. Counterintuitively, by risking less per trade, you'll likely earn more over time through better decisions and the ability to stay in the game through inevitable drawdowns.

Chapter 5: Turn Paper Trades into Real Profits

The transition from simulated trading to real money represents a critical juncture in every trader's journey. While paper trading develops essential skills, real trading introduces psychological pressures that can't be simulated. Making this transition successfully requires a methodical approach that bridges the gap between theory and practice. Jessica, a software engineer who had spent six months perfecting her trading strategy in a paper account, faced this challenge. Her simulated results showed consistent profits, yet when she began trading with real money, she immediately abandoned her proven strategy. Fear caused her to exit profitable trades too early, while hope led her to hold losing positions too long. Though her strategy remained sound, her psychology undermined its execution. Jessica's breakthrough came when she implemented the "Five-Minute Rule" before each trade. This simple procedure required her to verify five key elements before executing any real trade: 1) confirming the trade aligned with her test account signals, 2) checking that the bid-ask spread was reasonable, 3) ensuring she was using a limit order, not a market order, 4) verifying the chart pattern supported her entry, and 5) confirming she wasn't chasing a move that had already happened. This systematic approach prevented impulsive decisions and aligned her real trading with her successful paper trading. To implement this transition yourself, begin by trading with just one option contract, regardless of how much capital you have available. This minimal position size reduces the psychological pressure while allowing you to experience real market dynamics. Once you've successfully executed 10 trades following your paper-tested strategy, you can gradually increase position size—but never exceed the guidelines established in your trading plan. Set clear stop-loss and profit-taking parameters before entering each trade. Jessica used both time stops (selling after a predetermined time period regardless of profit or loss) and price stops (selling when the position reached specific profit or loss thresholds). Having these parameters established in advance prevented emotional decision-making during market hours. Perhaps most importantly, maintain your paper trading account even after transitioning to real money. Continue testing new ideas in simulation while implementing proven strategies with real capital. This creates a continuous feedback loop where your paper account generates new insights while your real account builds actual profits.

Chapter 6: Develop Your Personal Trading Discipline

Trading discipline isn't something you're born with—it's a skill cultivated through intentional practice and structured routines. The most successful traders aren't necessarily the smartest or most knowledgeable, but rather those who consistently follow their established rules regardless of market conditions or emotional states. Mark, a former gambling addict who transformed himself into a disciplined trader, demonstrates this principle perfectly. In his early trading days, Mark would chase any stock showing momentum, frequently overtrade out of boredom, and routinely ignore his stop-losses when trades moved against him. His turning point came after losing 60% of his trading account in just three weeks. Recognizing the similarities between his undisciplined trading and former gambling addiction, Mark created a comprehensive trading plan with non-negotiable rules. Mark's transformation began with his daily ritual: rising at 5:30 AM to review market news, followed by updating his watchlist and setting up his test trading account before market open. He established strict position sizing limits, never risking more than 1% of his account on any single trade. Most importantly, he maintained a detailed trading journal where he recorded not just his trades but also his emotional state and whether he followed his rules. Developing your own trading discipline starts with creating clear, specific rules. Define exactly when you'll enter trades (for example, only when a stock shows confirmed strength in your test account and aligns with a favorable market behavior pattern). Establish precise exit parameters for both winning and losing trades. Create position sizing guidelines that protect your capital during inevitable mistakes. Next, implement accountability systems. Keep a detailed trading journal that tracks your adherence to rules, not just your profits and losses. Review this journal weekly to identify patterns of rule-breaking that need addressing. Some traders find an accountability partner helpful—someone who reviews their trading journal and challenges instances of broken discipline. Recognize that perfect discipline isn't achieved overnight. Mark initially struggled to follow his stop-loss rules, so he programmed automatic stops into his trading platform, removing the temptation to override them manually. As his discipline strengthened, he gradually allowed himself more discretion while maintaining his core principles. The ultimate goal is developing discipline so ingrained it becomes automatic. As Mark discovered, true trading freedom comes not from doing whatever you want in the moment, but from the confidence of knowing your systematic approach will generate consistent results over time.

Summary

Throughout this exploration of market volatility and trading success, one truth emerges clearly: the market rewards preparation, discipline and systematic approaches while punishing emotional reactions and improvisation. As Jesse Livermore, one of history's greatest traders, wisely observed: "It was never my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight!" His words remind us that trading success comes not from frantic activity but from methodical preparation followed by patient execution. Your journey to trading mastery begins today with a single step: establishing your test trading laboratory. Start small, using paper trades to identify genuine market opportunities before risking real capital. Commit to following winning stocks rather than predictions, analyzing market behavior patterns objectively, and maintaining strict position sizing discipline. The volatility that terrifies unprepared traders will become your greatest ally once you've mastered these fundamentals. The storm doesn't have to sink your ship—with the right preparation, it can fill your sails and propel you toward trading success.

About Author

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Michael Sincere

Michael Sincere (www.michaelsincere.com) is the author of a number of investment and trading books, including "Understanding Stocks 2E" (McGraw-Hill) and "Understanding Options 2E" (McGraw-Hill), each which sold over 100,000 copies each. His two latest books are "Help Your Child Build Wealth" (Wiley) and "Mr. Sincere Teaches You How to Sell Covered Calls." Sincere has written hundreds of columns and magazine articles on investing and trading, including a monthly column for MarketWatch, "The Long-Term Trader."

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