Trading Like a Casino – The Interview with Michael Gross and Don Singletary


Jun

28

2016

Trading Like a Casino – The Interview with Michael Gross and Don Singletary

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(Audio Transcript)

Michael: Hello everyone, this is Michael Gross of OptionSellers.com, here with your monthly guest expert interview. This month’s guest expert is Don Singletary, author of the Options Exposed Playbook. Don spent 25 years as a consultant for commercial commodity hedge plans, helping him to implement option strategies to lower cost and increase their efficiency. He has also spent much of that time as an individual options trader. He is going to bring a unique perspective on that to you today. Don, welcome to OptionSellers.com Guest Expert Series.

Don: Well, thank you very much, Michael. I’m glad to be here. It’s my pleasure.

Michael: Don, let’s start off by telling us a little bit about your background and how you got started in the trading industry.

Don: Well, there is a lot to talk about today about options and making money, so I’ll get to the buy out part pretty quickly here. I started in broadcasting at the age of 15 and I grew up in a small town that only had 2 radio stations. I worked for both of them- they used a different name at each one. While I was in high school, I became a licensed broadcast engineer, continued electronics in the Air Force, worked countermeasures during the Vietnam era, and worked for the Motion Picture Bureau at the Florida Department of Commerce and Economic Development. I had the pleasure for several years, a week every month, I spent in Hollywood, California. It’s a pretty remarkable “bubble-world” out there, and it still is. Patty and I were just starting a family in those years and that took a lot of travel, so I gave being a stockbroker a try. One of my specialties there was introducing customers to the covered call writings, sort of a specialty of mine. Now, back in those days, in the mid 1980’s, it was very much a bull market. I think a drunk monkey with a dartboard could’ve made money. As luck would have it, I got to be a broker during those few months. I got a good offer to teach at a technical college right before the big bust in October of ’87. I took a lot of my customers in cash before I left, not because I was smart or I knew a market crash was coming, I just needed to make a lot of money and they had become friends of mine and I didn’t want to leave them hanging. I kind of put them all in cash and gave them a proper goodbye. Now, when the market crashed 30 days after I left to take the college professor job, my clients thought I was a genius. That’s certainly not true- I was just lucky! So, the greatest work and financial undertaking I ever had was the last 20-25 years. I never saw it coming. I don’t think anybody grows up to be a consultant to private corporations for risk management. I never even knew such a thing existed. I spent thousands of dollars on commodity books and the best option modeling software that I could ever find, and I bought a few of the newest and most powerful computers in the early 90’s. I think I thought I was going to be a trader and make a lot of money, but fate stepped in. That was coming, but it’d be later. It was something I never even thought. I got a call from a commodity producer who’d seen some of my option modeling that I’d faxed to a buddy. That phone call resulted in the working in risk management for the next 25 years. I got to work with some amazingly smart and creative people at the top levels of some major corporations, and it was just my good luck. I really got an education that money can’t buy.

Michael: Well, we’re hoping you can share some of the pointers you picked up there with us today, Don. I know one of the reasons we wanted to have you on was that you kind of have a unique insight and you have insight into the commercial side of this business, but you’ve also been an individual investor, so you have insight into that side as well and can give maybe people a perspective from both sides of that coin. Before we get into that, Don, I want to talk just a minute about you book, Options Exposed Playbook. Just a great options book for anybody that’s interested in learning about options. Don does cover some option selling strategies in there that I thought were very excellent discussion of. Don, you told me a great story earlier about how you came about writing the book. Can you share that with our listeners?

Don: Yeah, I’d be glad to do it. I was winding down my standards of risk management consulting, and I decided to stay home. There’s an old saying by Ernest Hemingway that says, “I drink in order that my friends are more interesting”. I wanted to take some time off and give that theory a test. Fate wasn’t to be. A friend of mine had called and we often talk investments. He said “Hey, I got something here I have to show you. I want to get your opinion. You’ve got to see it!” I said okay. So I met him for breakfast one morning and he showed up with two or three pages he had printed out on the Internet. Attached to the papers, the first thing I saw was that he had already made out a $3,500 check to some investment guru to buy this system. Now, my friend, he’s usually not that excitable, but he was just real excited and said “Look here”, he put his finger on the paper, and I read with him. It said “98% winners for 5 years”. It promised that anyone could probably turn $25,000 into $2 million in that 3-5 years, and that it would only take a couple hours a week, and it took almost no work. I stopped believing in the tooth fairy a long time ago. There are people that live in Austin, Texas in a little bubble who still believe in him, but I’m not one of those. So anyway, I took a good look at the pages he gave me and this magic system used vertical credit spreads, covered calls, and iron condor spreads. It promised the subscribers all they need to make themselves plenty rich with almost no work and in quick time. Now, years ago, I did a stint in the Air Force and I lived a while in West Texas. West Texans have a colorful way with language, so I told my friend a little saying I picked up back in those days in West Texas. “If a fella comes at you with a ten gallon hat pulled over his ears in an ear to ear grin, and he seems too glad to see you while shaking your hand a bit too much, you better look down and make sure he ain’t peeing on your boots”. We’ve all seen them, and we get these kinds of things in e-mails and in the regular postal mail all the time. By the way, Boone Pickens didn’t say that, but maybe he should. I took a couple of sheets and scratch paper and I showed my buddy how to do these pre-strategies. I had a little experience with them doing options. But I just told him, this is all the guy is really doing and he is doing it over and over again. Personally, I don’t believe for a minute the fantastic claims he makes. My friend interrupted and said, “Well, if he’s half right, I’m going to do really good!” I said “Yeah, that’s true! I can’t argue with that!” After I took a couple of pieces of note paper and scratched out some diagrams and made a few notes, suggested a few places where he could find some more information, he tore up the check and he said “You should write a book about this”, and I was giving my friend all the reasons why I was not, absolutely not, going to write any book on options right now. I left that meeting thinking that I had done my good turn for the day. When somebody tells you not to think of elephants for the next 2 hours, every time you close your eyes it’s all you can see. So, I started thinking about it if I was to write this book. I’m more or less retired now, but if I were going to write this book, what would be in it? Before I knew it, I was consumed by it and it only took about 10 weeks to write the book. That’s the Options Exposed Playbook that I have and I was a lucky man as far as selling really well right away. I got very interesting e-mails from a lot of readers. Some had absolutely no experience and ranging all the way up to Ph.D’s who were asking me about the inadequacies of the Black Scholes Formula, and that’s a conversation that I did not want to get into. Before I finish this story, I was preparing for this interview this morning, and here’s one here from The GURUS Selling System. It says “I know I’m reaching you on Sunday, so I’ll be brief, but you’re about to miss out on the best opportunity to make money you’ve ever seen….You see, this guy selects trade recommendations with a high probability of doubling your money. For example, on May 16th, made 106.9% gains in 3 days. May 17th- 70.4% in 2 days. May 23rd, I made an amazing $8,000 in 24 hours.” Now, these kinds of ads prey on people. Often, it’s people who are desperate who could believe an ad like that. Here’s another one that says “Just 7 days, you pocket $2,000 on one trade and you make $725 the next day in 4 short days. You make another $950 and people make $100,000 a year this way”. These types of ads cater to people- not a sophisticated audience, but they cater to people who are hardworking people and think like my friend did that if they’re half-right, they’re going to make a fortune. One of my motivations in writing that book- I don’t spend a lot of time in it bashing these kinds of systems, I think that’s a waste of time- I simply wanted to save beginner and small intermediate investors, beginners small and medium sized accounts, I wanted to save them from playing the slot machines. I noticed in your book and mine, as we did this completely independent from each other years ago, we used casinos as an example when we talk about selling options. In my book, there’s a line in there that says “You went to a casino and the manager said ‘you’re kind of stupid. We’re only going to let you play the slot machines’.” You can’t sell options if you’re not sophisticated yet because you don’t have the experience. The slot machines pay out 95-98% of the money that’s put into it, and there’s always somebody that’s at the machine ringing and flashing its lights. When I go to Las Vegas, the first thing I do, just to remind me where I am, is I go down… Las Vegas is a Petri dish for human behavior, and I’m a people watcher…. I go down and I pick out rows of a hundred slot machines. At any given time, one of them is ringing and flashing loud bells and whistles, but I’m looking at the other 99 who all have losers sitting in front of them. Those things are like parking meters. The more you play, the more you lose. I think buying options can be that kind of game, but somebody hits it big once in a while. It’s like playing golf- you tell somebody about your hole in one you made for years, but you never talk about the ones you lost flushing them into the woods. I think investing and gambling may have some of that human behavior in common. There’s an old saying that says “Experience is what you get when you get what you didn’t want”. I’ve had a lot of experience!

Michael: Well, your experience has certainly resulted in an excellent book, Don. Wanted to congratulate you on that and certainly recommend that to anybody reading the book. I wanted to go back and touch on the point you made about the guy selling courses for thousands of dollars, and usually selling them to the people that aren’t really educated that much in trading, although not always. Even experienced investors sometimes will buy these courses. I don’t want to bash all of them, because I know some of them have some good information.

Don: Sure they do, Michael. One of my favorite books is by the old guy Will Rodgers. It’s what keeps me humble- that and investing. He said that everybody’s ignorant, just about different things. When I’m talking about neophyte investors, who earnestly are hardworking people, are very prodigious people in their work and their demands, and they’re just trying to do better, their motivation is absolutely stellar. Anyway, go ahead.

Michael: Sure, no, that’s a great point. But there are a lot of these courses at there that they are charging these thousands of dollars for promising outrageous profits. In fact, I wrote about one in the upcoming newsletter where there’s a guy on CNBC now that said he took $4,600 and turned it into $460,000 in 2 years. I would be a little skeptical of those types of claims. The thing about it that a lot of these people don’t realize, even these courses that are good, a lot of that information you can get by picking up a couple of books for $30, $40, $50 a piece. Your book is a perfect example. When I talk to you about this book, I said “So, are you selling a course? Do you have a seminar?” and you said no, I just wrote the book to help people understand how to do this, so you don’t have anything you’re selling. It’s purely a book that is showing people option strategies that have worked for you, kind of bringing a perspective of both the personal and individual investor side to it. When you wrote the book, what would you think the biggest difference is or maybe the biggest advantages of being a commercial player or the advantages of being an individual investor?

Don: That’s a great question. A lot of people- just hate the word hedge fund, which when you’re in risk management working with a corporation, usually ad commodities, it’ll be something like cotton, coffee, or orange juice or sugar. The goals of the commercials and the individual speculators are almost polar opposites. In helping people with their commercial risk management plans, and the term hedge fund is not the same as a fund you use to hedge for risk management. I don’t want to get into the semantics of it, but there is a big difference between the two. Commercial players I work with and the people who use hedge funds, their motivation is to preserve their capitol, to eliminate risk, and to get the highest possible margins on their products that they can. Now, some of them are selling commodities and some of them are buying them, and these can be commercial players on both sides of the same market, of course. It’s not just the speculators vs. the commercial players. I’ll give you an example: Maybe a speculator is selling a $5 bushel call for a relatively small premium and maybe this plant makes ethanol and has to buy corn. If corn goes over $5 a bushel and he has to pay that price, then he’s not going to have much profit margin, if any at all. So, what he does is buy a $5 corn call and if pollination doesn’t occur right, or weather gets too hot, or demand ceases or whatever the reason, if corn prices soon pass $5, instead of going out of business or having a year so bad he has to work the next 2 years just to make up losses, then they buy $5 calls and pay too much for their product, corn, which helps them make ethanol. At the same moment, somebody else on the other side of the market is saying, maybe a speculator, “Boy, corn has got some of the lowest stocks it has had in 5 years. Last year topped at $4.60 and maybe it’ll hit over $5 this year. Maybe I can afford to spend a few hundred dollars to bet that corn prices are going to hit the ceiling. Then, these two orders at the markets someplace meet, the transaction occurs, and everybody’s happy with what they did. It’s just about a zero sum gain. I don’t really see what we did. In fact, we used to have a rule and I explained this to my customers because I knew the CEO’s I was talking to would be talking about risk management. I discouraged them from using the word “profit” at all, and substitute the word “margins”, because we don’t care. We lose a bunch of money in a risk management account, and they say they’re startled to hear me say that. I say “Well, if it means you make more profits, then that’s fine! A higher profit margin is the goal and we’re not going to call them profits because they aren’t profits for the company.” Motivations in conserving capital to get rid of price risk and delivery risk, weather, or government upheavals, or changes in the laws and all those things. Plus, frankly, in the risk management programs, they can make some very creative contracts about buying options that they can offer their potential customers to give them an edge over their competitor…. things like that.

Michael: Okay. So, a lot of the things you did in the commercial side of it was really helping to manage the true definition of hedging, where you’re helping them manage their risk for the price of the commodities they’re actually working with, whether they’re taking delivery or selling them. You have speculators on the other side that are taking the other side of those trades and both sides are getting what they want.

Don: Many times, I work for an orange juice company, at a processing plant, and they had a lot of their products sold, but they still had millions of gallons of orange juice in the tank. It wasn’t priced yet, it wasn’t sold, and they had uncertain profit margins to consider. Another of my clients, at the same time, was on the other side of the market. It was a very large grocery store chain, and they knew how much shelf space they had for orange juice, and they knew from years and years of selling orange juice about how much they were going to sell in the coming year. All the orange juice they know they have to put on the shelf but they haven’t bought yet is a price risk to them. If you had a freeze and all of the sudden prices went up and people who couldn’t even deliver the orange juice because of the damaged crops, the grocery store still has the same shelf space and demands from their customers. So, they would hedge and release themselves by selling options and contracts to speculators, they could insulate themselves so the contingency of price and delivery risk, that kind of thing. What’s fascinating is I felt like Dr. Jekyll and Mr. Hyde for working both sides of the market, but, actually, they weren’t really at odds with each other, they were at odds with the risk that was in the market – and both of them could successfully make trades to help meet their margin goals.

Michael: Yeah, that’s a great point. A question we get often here is, a lot of people ask, “Well, you guys are selling these options. Who’s buying these deep out-of-the-money options? Yeah, sometimes it’s other speculators that are buying lottery tickets, but a lot of the time it’s these commercial players that don’t want to buy them, they have to buy them to insure their business. It’s like buying insurance.

Don: Absolutely. It may be from a speculator who said, “Man, I’d never do that. Who’s crazy enough to take the other side of this trade?” 80% of the options expire worthless, as you point out in all of your material, too. That’s pretty good odds from the start. The thing I love most about selling options, and this is all in your book and mine I supposed, it doesn’t demand that you have to guess price direction. The amplitude of the price changes, nor do we have to do that within a defined time. Buying options is like standing on one leg and shooting at a moving target. Selling options can be like making a partnership with gravity. Gravity and time decay both work regardless, rain or shine, 24/7, in all kinds of conditions. They’re not dependent on the stock market and commodities, and they don’t depend on public opinion or on anything. One of the things about the financial channels, and, you know, this is July of 2016 and we’re in the middle of this presidential thing going on, which is the real Petri dish of human behavior, I think. It’s interesting no matter which side you’re on. It’s just crazy what the news channels do. It was all about the candidates a few days ago, they were running out of news, they were getting in experts to talk about every contingency that might happen. It was a slow news day, so they would take the small stories and somehow embellish them a little bit and bring them to the top so they could keep listeners, so they can sell adds, so they can make more money. It’s really funny on the financial channels, they even do that. This tragedy that happened in Orlando, Florida 2 days ago, now the financial channels are not talking about politics, but they’re talking about terrorism and what that means to investments and which investments would be best if there is a terrorist attack. These guys, with all do respect, they have some very bright people, but they have a tough job. They have to show up every day to a non-scripted program, and this goes for network news, too, and they have to take whatever is in front of them and make it sound like the sizzle on a steak and sell it to the listeners every day. With TV, they’re able to do that. Aaron Spelling, I think it was, said one time “The TV, you don’t have to be really good at programming because TV is a medium that has a default that’s kind of the most effortless thing to do- you just sit there and watch it.” I do it, everybody does it sometimes. It’s a rest for your brain sometimes, or whatever your reasons. It’s interesting and all of this fast Internet information everywhere we can get, it’s a lot of toxic half-truths and innuendo information. My mother-in-law, who’s in her 90’s, I tried to keep her from watching the news because she would just buy a new lock to put on the door every time she saw the nightly crime report. I think investors made that mistake when they watch the financial channels, and maybe some of the other news. It’s just a type of telescopic fear. It’s like you never think about an asteroid hitting earth. Matter of fact, just 3 weeks ago, there was a comet that came within 2.2 million miles of the earth and it was ½ a mile wide, and it would have had a giant impact and probably killed hundreds of millions of people. But you didn’t hear about that in the news, and we’re always in that unlimited risk like that, or satellites breaking, or things like that. I think unlimited risk gets a really bad rap because people are always taught to be afraid of it. There’s some merits that you go into in some great detail, and you and James Cordier’s material about what unlimited risk is and what other people sometimes fear. There’s a way to understand it and a way to be able to use and to do it intelligently and within the laws of a very good mathematical probability. You guys do a great job with that.

Michael: Thank, Don. I appreciate that. You made a great point there I want to go back to for just a second, because I think it’s important and we talk about it a lot as well. The role of the media in both stock and commodities prices… we talk about, in some ways, you can actually use it to your advantage. The way you do that is by doing your own research or knowing where to go to look for that fundamental research on your own, and knowing what’s important and what isn’t, because if the media, like you said, they have a slow news day or they feel like covering something, they can take something that’s really, in the big picture, somewhat insignificant, and make it seem like it’s a big story for that individual stock or commodity. That can move the price- maybe not for the long term, but for the short term. If you know what the real story is, you can take advantage of that as a trader. It’s one of the reasons we spend a lot of time on fundamental research here and we recommend individual traders, if they’re trading on their own, they do the same thing.

Don: Right, and that’s another reason why I love commodities. I have great respect for the work that you and James do there. It’s because you study the fundamental information on these markets. You know where the corn stocks are, you know the seasonal patterns, you know when grain pollinates, you know when the harvest begins, you understand world market, and you understand the United States Market. There was a story on TV on something that kept the commodity prices really not in sync with the true supply and demand. You have the ability because of your experience and because you stay up on these things- that’s your job. You can talk with your investor and let them know that it’s a puff news story or rumor or whatever. A number of years ago, there was one case of mad cow disease in Canada or someplace that crossed the Northwest United States. This sent ripples through the commodity markets, just on potential that we might not be able to buy a steak in 6 months. As a result of that, on down the line, prices went way up on the cattle. A lot of people that thought they wouldn’t be able to afford cattle got rid of the breeding stock and we’re still recovering from that, even though it was years ago. It takes a specialist in commodities and in these markets. Each market can be very specialized, and I don’t know very many people, any people, who are good at all the commodities markets. I know people claim to be, but I’ve never seen it and I’ve never heard of it. You have to go with 4 or 5 markets that I’m familiar with and have experience with and it’s kind of like writing a book. You have to write what you know and you invest what you know. You take things that you have all that experience in, rather than take a whack at something that might look attractive temporarily but you really don’t understand the market. That’s the value of having somebody like you at Option Sellers. These high net investors you serve, that’s the pivot and the very heart of what you do. The other side of that is being able to know the math and understand the mechanics of the market and things like seasonal volatility, and you incorporate fundamentals in there. With a high net worth investor, they can do things that most of my readers probably will never be able to do. They have a large enough capitol. You take a small investor that’s just starting out and maybe has an account of $10,000. There’s no way he can afford to draw down $5,000 the first week he makes a commodities option investment. I find net worth investors are not only able to tolerate that, but able to use the system that you guys use. I think it’s amazing and they can have a great deal of success with that. The huge benefit to investor for the types you do, I don’t recommend people start off dealing with a highly complicated commodity market, and the strategy that might be a naked option with unlimited risk, because, for a small investor, that can put you out of business in 2 days. You’re done. I teach that we’re going to start this way, we’re going to practice it, and we’re going to build it slow and sure and they can be able to do that. They can’t afford the same programs you offer for high net worth investors. For the people who do fit that category, I’ve never seen a better way to do it than what you guys do.

Michael: Well, I appreciate that Don. I do, that’s a great point to make, as well. I do agree with you. I think there are some advantages of economy of scale when you get into and working with higher dollar amounts. Obviously, that’s one of the reasons why we have our minimum where we do. There are strategies that can fit almost any size of investor. It’s just a matter of matching the strategy. Let’s talk about that a little bit, Don. You’ve traded commodity options, you’ve traded stock options, do you have a preference for either one or an advantage(s) you think one might have over the other?

Don: Yeah, well, like you just said, you’ve got to find suitable investments for the right advisors. For myself personally, since I have a lot of experience in both stocks and commodities, I stay in both. To me, normally, people will trade stocks first because some of the volatilities and some of the limits on all the smaller accounts, and they will start off in stocks and things. Those are the people that I suggest in my book a great deal, and I don’t talk a lot about commodities in there because I don’t want to give beginning investors the impression that they can make a killing in commodities. I’d start to sound like one of those ads I read a moment ago. Those things are doable, but they have to be doable to the right investor. Giving advice to my readers, one of my favorite trades is the vertical credit spread. They can put a capitol on a risk and make a relatively high return in 30-60 days out selling some options, and then they buy an option further out-of-the-money so they put a cap on any lawsuits they might have. When you do that, you can compute the risk and it helps you with your money management in the account. Just like a floor trader, your first job every morning is to get up and survive to invest another day in preservation of the capitol, whether you’re a large investor or a small one. That’s number one above everything else. Now, I don’t get paid for selling any advisory services. I just do not want to do that. I ran around for a long time and managed a lot of money in hedge accounts and things, so it’s not something that I want to spend, at my age, the rest of my life doing. So now, I just love being able to write and share some of the information every day. I had a note here that I wanted to go over with you… These days, the old pros that learned years ago when they were doing Black Scholes computations, slide rules, it’s so 1985, to tell new investors that you don’t have the experience, you’re better off not even going with those options at all. You go find yourself different stocks. I read a Warren Buffet story one time that had a great impact on me. You remember the old mutual funds, and still many people have them these days. The ETF did kind of a better version of some of that type of investing. I don’t miss mutual funds lately, but I don’t choose investing in them. It’s because of what I read that Warren Buffett had said. I’m paraphrasing, “If I own race horses and I have a stable of 80 horses, and I know that 10 of those horses win 90% of their races. I’m not going to run all 80 horses, I’m just going to run the winners and stop picking now when the market has a new normal because of the news channels, the types of investments, and the sophistication. I think you have to find some winning bets. Frankly, 80% of options expire worthless; they’re certainly investigating to be able to go there. But you don’t race the whole stable, even though they are all thoroughbreds, because you just tend to jot down your profits. We live in an age with Internet and all the toxic information along with the good. The trick is being able to shift that out and to be able to discern which kind of investment is right for you.” I think Warren Buffett was on to something there. You know what they say about normal- it’s just a setting on the dryer. None of us are normal. Our needs and aspirations and everything are just not the same. I think those are decisions everybody has to make for themselves.

Michael: I love that analogy of the racehorses and I also like the way you applied it to the options because it really does carry over like that. As you mentioned, if Warren is listening to the OptionSellers.com Radio Show, we certainly invite him to call in and give his opinion on that.

Don: Well, he has been known to make millions off of covered calls.

Michael: I know. It’s surprising if you go in at times in different part of the Wall Street Journal articles about who bought or sold these many options in the options market, and you don’t picture guys like Warren Buffett and Carl Icahn making these big option trades. You see them taking positions in stock, but they sell a ton of options. It’s well documented.

Don: They’ll buy a great dividend stock these days that’s 2 ½ or 3% and then they sell covered calls on it. I don’t have their numbers in front of me, and I never will, but they might be able to make 5-15% more a year depending on the markets and the timing, but they can make a very nice return. Putting your money in the bank these days, you remember the old rule of 72… you just divide the annual interest rate into 72 and you get the years that it takes to double your money. If interest rates are 2%, it’ll take 36 years with your money in a bank savings account in CD’s to be able to double the money. For most of us, that’s just not acceptable.

Michael: Yeah. I agree. I want to go back to something you mentioned because I did want to re-visit your book for just a second. You describe some really solid option strategies in there, but you said your favorite option selling strategy, you preferred vertical credit spreads. That’s one of our favorite strategies, too. Can you maybe just go through a quick description of how you would write that if you’re writing it on a stock or commodity, for instance? You probably talk about stocks in the book, so maybe just talk about how you would do that on a stock.

Don: Sure. Well, first of all, I’d pick a stock. The nice thing is, and you go over this in your material too, anybody selling options has to understand that one of the major advantages is that I don’t have to guess prices direction or the amplitude of the timing. I just need to know where I think the stock price will not go. Then, in ¾ of the time, I’ll make money with it. That’s the whole thing. Vertical credit spreads limit themselves to this. If I had a stock that I think is going down or that it has already gone too high, I don’t try to press the reversals, but maybe it starts reversing. You want to be able to try and sell some options. With the market near it’s top all-time highs now, there’s a school that thinks it’s going higher, a school that think it has got to turn around and go lower, citing the bad economic news given daily now. I have no idea which one is going to be right. That’s why I don’t sell the apart, out-of-the-money call if I think the stock is going down. That leaves you with unlimited outside risk, because if price overruns your strike price, you’re going to be in the hole- it’s going to cost you and you’re going to lose money. With a vertical credit spread, you go just a little bit above the strike price. You go a little bit above the price where you sold the call and you buy a cheaper, less expensive call, and that puts a cap on your potential losses. So, with a cap on your losses, let’s say you’re a beginning option writer in stocks. You may collect $150 in premium by selling the call at a lower strike and then by buying one of the higher strike you might spend a third or a half that money, say $50 out of $150 to put a cap on your losses. So, if you have losses that are at the most $500, and you can make $100 profit off of it, that’s 20% in 30-60 days, which is great return on your money.

Michael: Now, that’s a great strategy. I was glad to hear you say that because a lot of books and going back to some of these courses out there, they’ll talk about things like converted butterflies and everything. I know those can have their place, but a lot of times, especially for individual investors, they can be difficult to implement, especially if you’re doing it on a larger scale. We always say simple is better and vertical spreads are a great, simple strategy that can also be very effective.

Don: One of the things, I get a lot of e-mails from my readers, and a lot of these people have never dealt with options. Most of them have little stock experience. A lot of them, frankly, are young millennials who had a couple of babies, they’re married, and they’re working as hard as they can, and they have money saved and they want to be able to use their laptop or iPad or whatever it is to be able to fiddle with options to try and make a little extra money. Of course, I try to tell them fiddling is not the preferred word and let’s get to work. You can make some money that way, but you have to be very, very careful about what you do as part of that with money management controlling your risks. The vertical credit spread and small steps are able for that. Another thing about most of the e-mails I get from my readers- almost everybody and I think that as a society, the financial planners have taught us to think this way. Maybe they’ve heard too many bank commercials, I don’t know what it is, but people immediately start thinking in terms of making thousands of dollars over years of time. I think that doesn’t allow them the focus that they need. It’s fine to dream and have a plan, we all do it, but when you wake up in the morning and you have something in front of you that you have to deal with, investing some place, so I try to tell them just to find an easy goal. Maybe start with trying to make $50 or $100 a day or a week or whatever suits their account. That’s very doable. You can’t get up in the morning and make several hundred thousand dollars and put it away and wait 20 years to collect it. I suppose there are some ways you could do that, but for an individual investor, you have to deal with what’s in front of you. I think trying to help people focus their attention to something they can do right now to begin to achieve some of the longer-term goals is the way to go.

Michael: Yeah, that’s a great point. It’s a great discussion on options there, Don, and I appreciate that feedback. Let’s just talk a little bit briefly here to talk about how you pretty much trade for a living now. Would you say that’s a fair assessment?… Or professional trader? I know you trade a lot of your own money, but do you have an opinion on the stock market right now for 2016? What’s your outlook?

Don: Well, it depends on what the talking heads on the network say. What’s so funny to me is that those guys can come out one day and explain a bull market and then get up the next morning, go in at 6:30, and they’re talking about the bear market that we’re in and they never bat an eye. They can change. There’s a reason for that- it’s almost impossible to forecast what the market is going to do next. I can’t do it- I’m not that good. For that reason, I choose options and I try to make my money by knowing probably ¾ guess on what’s not going to happen instead of trying to predict what is going to happen. I think my odds are a lot better. I know it’s a disappointing answer, and when they get these experts on CNBC or wherever, at the end of the interview they say, “Well, what do you think about the market?” They always have a good answer and then they back-petal a little bit. Then, when it’s all said and done, I’m thinking, “What exactly did you say?” It’s confusing to me. I can’t tell the future. All of us can connect the dots backwards, but trying to do it forward is just impossible, which we talked about the other day. Nassim Nicholas Taleb has a book called Black Swan, and it’s about improbable events. If you’re a little bit of a sophisticated investor and you love to figure the odds of investing I think it’s a must-read. It’s a really interesting book. Whether you’re an investor or not, it’s a little walk down probability and philosophical terms.

Michael: I’m familiar with the book. It’s a great book for especially sophisticated investors- somebody that’s really looking to get into trading and understand the nuances of it. Your answer was not disappointing at all. In fact, the guys that say “I don’t know what the market’s going to do. Nobody knows what it’s going to do”, those are usually the guys that really know what’s going on. I like that answer.

Don: It’s like you say in your new material- sometimes you can take a news event or whatever happened, whether it’s stocks or commodities, sometimes those over-reactions or under-reactions can present some great investment opportunities.

Michael: I agree 100%. One of the things we like to say is, and it takes people a while to get their arms around that, because it’s almost the opposite of what everyone else is doing, but you’re saying “Look, I don’t know what the market is going to do. I’m just going to pick something I think it’s not going to do.” Once people can understand that approach, it changes their whole outlook on how they invest.

Don: That’s right, and a lot of people will tell you otherwise. But by and by, just keep your boots dry.

Michael: Yeah. That takes a minute to think about, but that makes a lot of sense. Going forward, I know we’re not making predictions here, but do you have any favorite sectors of stocks or commodities or anything you’re keeping an eye on for the rest of 2016?

Don: Well, I think part of the new normal that is developing, and we don’t know if it’s right, hindsight or not, but I look at the individual stocks and the ones that are my favorites are not gambles on new technology, but trends because of disruptive technology. The greatest example of that right now is a stock that I own known as Amazon. To these people, there seems no end. Half of their income now is from AWS, Amazon Web Services, in this cloud computing that they’re selling. They’re not even famous for that and it’s half of their income for the company. I’ll be the first one to tell you, on our way downtown, my wife asked me the other day what I want for Father’s Day. I said, “Well, I have a few items”, and she said, “Well, I’ll take you shopping”. Immediately I’m thinking, “Whatever it is, I can get it cheaper on Amazon and have it here in 48 hours”. I’m guilty. I know people do this all the time but I’ll admit it that I walk into brick and mortar stores and I’ll find something there and I’ll just think that I can make a better deal by internet shopping. I’ve done it for years. I’ll step outside the store and get a cup of coffee, get my iPad, and I’ll order one. A lot of retailers get mad at me for saying that, but it’s just the elephant in the room- that’s what people are doing. Not in every instance, of course, there is still people who enjoy going through the deals and being able to go out, it’s a social activity. When I need something, I’m busy and I don’t want to spend 30 minutes in the car to go down and buy what little item I needed- I’ll just order it online. Again, that’s my point with disrupted technology. This is what happens for investors, too, specifically smaller investors. Maybe you and I were investors a few years ago and we didn’t have the same information the pros have, we didn’t have instant quotes, and our smart phone has more electronics in it than the Apollo 11 Moon Mission to put a man on the moon. Commissions have fallen- first it was the discount commissions, you know, Charles Schwab and those who were innovative in that area. Now, electronic trading on a portable computerized device – iPhone, iPad, Tablet, Microsoft, whatever it is – that has displaced a lot of the brokerage business. For small investors who want to use self-directed accounts, it’s a perfectly great way of doing it. Conditions are low and you have the same (virtually) news and quotes that the pros have. Of course, for high net worth investors, they have the option because of their accomplishments of being able to probably find an easier entry point by finding somebody like you guys.

Michael: Well, yeah. I agree with your assessment there. Disruptive technology is really affecting almost every industry. It’s certainly a sector to keep an eye on if you’re a stock investor. Don, just on a personal note, what’s your favorite investment book? Not counting yours or mine…

Don: Well, like I say, although it’s not written as an investment book, I like books like Black Swan. I’m a voracious reader and I always have 2 or 3 books going at one time. I’ve got all 3 of the Taleb books right now and I’m alternating between them. There’s such good information out there in many things. I’ll just say Black Swan for right now, it’s not the book of a lifetime, but it’s one of the books I find pertinent in the type of environment that we have to invest in. We have to be aware and keep in mind those black swans – if you’re read the book or heard those terms, those are things that seem to come out of the blue and they’re totally unexpected but they have a very profound and lasting impact on society and culture and finance and everything else. It’s a wonderful topic and it’s very interesting to explore.

Michael: Absolutely. Don, how can investors buy your book? If they want to get a copy of it where can they go?

Don: One word: Amazon. The quickest, fastest way to get the best price, just go to Amazon.com and you can search for Options Exposed Playbook. That’s it.

Michael: Excellent. Well, Don, this has been a great interview. We really appreciate you coming on. We hope you’ll be willing to come back again sometime to give us some great information here.

Don: You bet, Michael. It is a pleasure to be able to talk with you more. I appreciate the opportunity and I want to thank all of the listeners you have out there and the people who have been reading your blog. Thank you very much, good day, and I’ll see you later.

Michael: Great, Don. Thank you.

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