Justin’s note: Over the past few months, I’ve shared a handful of essays from my colleague, master trader Jeff Clark…and our readers continue to write in with positive feedback.
As I’ve told you, Jeff’s one of the best traders I’ve met—and his track record can attest. Since 2005, his subscribers have had the opportunity to make triple-digit gains over 50 times and double-digit gains more than 160 times.
If you’re interested in becoming a better trader, the following essay is required reading. In it, Jeff shares one of the most important lessons of his career…
By Jeff Clark, editor, Market Minute
I was only 19 years old when I made my first options trade.
I had a gut feeling the market was going to go higher… so I bought four S&P 100 call options at $1.50 – a total investment of $600. A few hours later, the options were trading at $4.50. I sold and took the $1,200 profit – a 200% gain. And I was hooked on options forever.
[A stock option is a contract to buy or sell a stock. Each contract represents 100 shares. And each contract is fixed at a certain price… and expires on a specific date.
A call option is an agreement to buy a stock. A put option is an agreement to sell.]
My next trade was in tech giant IBM (IBM). I bought 10 $1 calls for a total of $1,000. This time, it took a couple of days to double my money. Next, I bought Digital Equipment put options… which nearly tripled in just a few days.
I made 17 trades during my first six weeks as a trader. Every single one was a winner.
Going 17 for 17 was a remarkable feat for a rookie trader – especially since I wasn’t using any sort of fundamental or technical analysis. I was just going with my gut. But I was careful not to put more than $1,000 or $2,000 into any single trade. And I still managed to turn my $5,000 brokerage account into $50,000 in just six weeks…
And then I decided it was time to get serious. No more tiny trades. I was too good for the small stuff. For whatever reason, I had figured out a way to beat the market. Heck, I had just rattled off 17 straight triple-digit winners. So I decided to take the $50,000 in my account, add to it my $25,000 in savings, and put it into a handful of options trades.
You can probably guess what happened next…
The stock market has a habit of humbling folks who think they’ve figured it out. For me, the humbling started right away.
At first, the positions started slightly moving against me. It was nothing to be concerned about. One good day would put everything back in the profit column.
But then, one by one, each position blew up on me. It was too painful to watch. I kept the television off and avoided reading the newspaper for fear I’d see something bad about the stock market and my positions.
When I finally got up enough courage to call the branch manager and check on the status of my account, I learned all the gains I had built up over the previous six weeks were gone.
“Just sell everything,” I said.
That was an expensive lesson to learn. But it’s one every options trader learns at some point. I was just fortunate it happened to me early in my career.
You see, that experience changed how I looked at trading. Instead of using options as vehicles for speculation – a way to juice my returns and get more bang for my buck – I started using them the way they were intended to be used: as a way to reduce risk.
Options allow investors to hedge their positions… and to risk much less money than they would if they bought a stock outright.
Rather than purchasing 100 shares at $10 per share, an investor could buy one call option for $50 and have the right, but not the obligation, to purchase the same number of shares at an agreed-upon time in the future.
This is a simple example. But the simplicity proves my point. Options allow you to risk much less and profit just as much as you would by buying stocks.
Today, I still do my fair share of speculating. But I’m not focused on how much money I can make. I’m focused on how little I can lose.
That’s a huge difference. It has allowed me to trade options successfully for three decades. And it allowed me to retire at 42.
Best regards and good trading,
Editor, Market Minute
Justin’s note: If you haven’t signed up for Jeff’s free Market Minute newsletter yet, I highly recommend it.
It hits my inbox at 7:30 a.m. ET every trading day, and tells me everything I need to know about the coming day’s market action. Since it debuted earlier this year, it’s quickly helped me become a better trader. And it will help you, too.
You can sign up for the Market Minute with just one click right here.