Why Options Traders May Have the Better Mindset

smbcapitalJohn Locke, M21 Trading System, SMB Options17 Comments

After fifteen years trading equities the insight hit me like a sledgehammer…

A casual conversation with John Locke turned into one of those movie scenes where the actor wakes up from a deep sleep with a new mission.

In my case it was a new thought process of how traders actually earn money. Now keep in mind here I am not talking about how to place trades but how to get paid. To put it bluntly, this seemingly innocent comment John tossed at me rocked my world.

The Outcome Is The Same, But The Mindset To Get There Is Drastically Different.


Equity trading is about price, stop-loss and profit targets. Options trading is about a time frame and windows of opportunities. Forty Five days and a price range between $150-$190; for example.

When you enter a new equity trade, your focus is on your entry price and your P and L. You are focused on static points and an undefined point in time for the trade to create opportunity or loss.

“Static and undefined” leaves a lot of room to get antsy about the result.

Here is the difference that John made me realize: Options trades are designed from the start to know how the ending looks and how long you have for that ending to happen. And it gets better. Most options trades have a window of opportunity within which they will earn money in a trade and multiple scenarios to earn a profit. In equities trading, you make a directional call. That’s it. One scenario and only one scenario makes a profit.

And it gets better. John explained that the trades that he employs have predetermined trade built into the trade management. He is expecting to need to adjust the trade. As long as the stock or index trades within a window of prices, within a certain time period, the probabilities are on his side.

Why This Is a Dramatic Difference

Options trading, as John teaches, focuses on holding and adjusting to the end. Hold and adjust for a certain designated time period, within a “price tent.” Its brilliant. The focus is on the end goal and adjustments are expected and planned. “We work the trade in a price range and adjust the window if necessary until the trade duration has expired.”

I have made too much money trading equities to say that options trading is “better” as John teaches and trades. I am, however, saying that multiple potential outcomes to earn money and a focus on the end is a seismic shift in trade management.

Learn the Process from John Locke

Sometimes good ideas can get lost in translation. I recommend you hear the insights from John himself at his next live event on May 29th. See if you agree with me.

Risk Disclosure
No relevant positions

17 Comments on “Why Options Traders May Have the Better Mindset”

  1. > “how traders actually earn money.”

    Earn? ‘Earn’ evokes an honorable occupation where one’s daily toil has benefited himself, his endeavor and society as a whole. Traders do not ‘earn’ anything. They may make money through the exploitation of knowledge, experience and selected information, but this making of money, this extraction of value from the investment machine, returning nothing back into the machine cannot possibly be considered an ‘earning’ process.

  2. Yeah, I’m aware. But I stand by my statement. Traders ‘earn’ money at the same level as a card counting blackjack player ‘earns’ his winnings. One would never say of Don Johnson that he ‘earns’ an honest living playing blackjack. The same can be said of traders. Investors may earn a return however, just like Warren Buffet earns a return on the companies he researches and ultimately purchases. Buffet’s investment practices benefit himself, the companies and society in general. Traders? Not so much.

  3. Your reasoning confuses morals with the market. The market is not, and never has been, a moral mechanism; it measures supply and demand, whether it’s apples or APPL.

    That’s what Warren Buffet attempts to do and that’s what serious traders on this site attempt to do.

  4. I know of plenty of professions that earn money but provide no benefit to society. What benefit does a street busker provide to society when no one ever listens to thier music longer than about 15 seconds. Even a computer programmer who works on a 2 year long government contract where all the software gets thrown away has earnt money, but provided no benefit. An oncologist who earns money, but most of his patients end up dead earns plenty of money but is not providing any value to society. When an options trader sells a put contract as insurance to your company pension funds he is providing benefit to someone who wanted the insurance. Stop judging others and live the best life you can, and leave every one else to live as they see fit.

  5. No doubt there are indeed other occupations that make money but as far as society goes may not ‘earn’ it. Afghani poppy farmers — do they earn their take? Smugglers and poachers — do they earn? I simply look upon the word ‘earn’ as one which society, as a whole, acknowledges as honorable.

    I wouldn’t group oncologists, those attempting to discover, in their own way, cures for cancer as not ‘earning’ their income. Nor programmers, who no fault of their own, end up writing software that may or may not make government more efficient.

    I’m a trader myself, and not burned out, and I actually write trading software too, but I would never consider my trading, that is, the extraction of friction based value from the investment machine (that the markets were originally designed to be) as an honorable activity. I do it so that hopefully I can become one of the 1%’ers.

  6. I do not see why we can not consider ourselves to be honorable, when other insurance salesmen of all forms would call themselves honorable. Options are just insurance for the marketplace, why should I be ashamed of that?

    Just to clarify my view on oncologists. They are not the ones that provide the cures or do the research, they are merely the ones that administer the toxins to keep future dead patients alive a little longer. The benefits they give to people are limited for most in that they just prolong and create more suffering in many cases. Still all honorable jobs, but of dubios usefulness to society.

  7. The subject is certainly shades of grey I would agree. And you make a good point about insurance. I found it interesting to note the social context that surround the word ‘earn’ and how it may or may not apply to most practices of market trading. Thanks for the civil discourse.

  8. I am a trader , and my activity could be characterized as an liquidity provider to the market which we need for functional economi . I have already donated close to 6 figures of my OWN EARNED money and did get nothing back in return yet . Now you can at least call me an honorable trader 🙂

  9. I went to medical school. Trust me, most US physicians/surgeons would rather be traders if they were guaranteed the same salary and more versus what they are earning these days, which is just getting smaller by the day. And a lot of them trade as well. The majority of docs do it for the money first, then the patients, if they even truly care about people because most don’t. I worked with one doc that was trading in between patients and who was always asking me for advice because i was better then him. however, most docs and scientists alike would not be better then the average traders because they are not risk takers, they’re too conservative and can’t pull the trigger. its a conservative thinkers mentality. But its not about “earning” and morals – everyone wants to make money, “earn” it, or whatever you want to split hairs about. Its also what we do with the money we have made that gives us gratification that it was well “earned.” Why do you think there is so much chatter these days about charities, philanthropy, and giving back. Its all about personal gratification in the end. It makes us feel good. We are not going to cure cancer anytime soon, but giving to charities makes the avg joe feel good for a second even though his $1 will never really add value to society. Thats the bottom line. Don’t be fooled. I trade to make as much money as i can every single day. I want to wake up everyday driven to be more successful then the previous day. Thats my passion. If i have to wake up, research stocks, plan my day and carry it out, then i feel like i “earned” whatever i make. I don’t care that my professional degree is not related to it.

  10. Providing liquidity to investors is a red herring argument, I’m afraid, but one destined for another post.

    Your donating considerable amounts of your income is a noble gesture, no doubt about it. However you seem to use it as a rationalization of pursuing a trading career. But it reminds me of a trader I once met who had a similar rational. He traded FX and felt that extracting funds from such a system was a victimless activity; that the other side of his trades were being taken by vast banks of sovereign states. He justified his wins by using a large portion of his take to do good works in his community.

    I considered this a reasonable pursuit but pointed out to him that this was an ends-justifies-the-means type argument. Sure a portion of his effort benefited society, but the effort itself was an empty activity. He then listed other similar ventures with similar empty impacts — mining of many types: precious metal mining, diamond mining, bitcoin mining, etc. He was simply FX mining. Hmm, good point I thought. I couldn’t argue with that but called his attention to the fact that in each case, the end result of one’s work was a hole in the ground on one side and a pile of cash on the other. If he was OK with such a legacy then so be it for I was sure that my own endeavors would result in just as shallow a result.

    Like I said, as in most societal subjects, it’s a discussion with many shades of grey.

  11. The markets are a mechanism of society and thereby ruled by the morals of society. Of course the markets must be a stationed within a moral context, no confusion there. For instance, society has deem insider trading an immoral act (using one’s position to preemptively steal) and banished it. One does not walk onto the trading floor and instantly the rules of society are suspended. (Well, yeah, they have been in the past, but eventually they all get caught.)

  12. > most US physicians/surgeons would rather be traders…

    That’s a sad commentary on a generally altruistic occupation. And if true then humans, as I’ve believed all along, are indeed just avaricious agents aching for their next cash score. And evidence for this is becoming more and more evident in the disparity between the haves and have nots.

    What’s funny though is that part of humanity’s success as a species is attributed to what they call the ‘sharing gene’, a selflessness that allowed early bands of humans to share to survive. And although charity and donations make up for some the above disparity I’m afraid it’s a mere token to what started out as true caring.

  13. Hmm. Sorry, but I hear more confusion. Laws = morals? Why politics?

    The social value of trading is actually a worthwhile discussion, but for me not here, so to perhaps agree with you and also end it.

    The capitalist market is the worst system ever devised of determining price. Except for every other system tried in the last 10,000 years.

    All the best with your trading.

  14. To me it seems apparent that profitable traders benefit themselves and their families, as well as society through the businesses they exchange their earnings with at the end of the work day. In addition, they benefit the other participants in the marketplace, because traders need other traders to be able to trade.

    As far as Warren Buffett, he is simply operating on a much bigger timeframe … that’s the only difference. He still takes advantage of other people’s lack of education, vision, maturity, and creativity to make his gains.

    I like to think of traders as merchants. In effect, they buy wholesale and sell retail. If we’re going to write this activity off as being an immoral occupation, then we’re going to have to write off many millions of business owners and shopkeepers as well.

  15. Several thoughts on this thread: The *value* of free capital and derivative markets to economic growth is or should be undeniable. The flow of capital to its most productive use underlies most free-market economic theory and the allocation of scarce resources to the unlimited needs of humanity. The relative political and economic freedom of the last several centuries has resulted in a standard of living that could hardly be conceived of two to three hundred years ago. Capital accumulation (production in excess of consumption) and the efficient and effective allocation of that capital is the underlying engine enabled by political and economic freedom that has amplified this benefit to humanity. Capital is a tool that requires a rational thought process to maximize its use/benefit. Capital is a living, breathing entity that ebbs and flows to and from various applications the efficacy of which is solely dependent on the rational minds that allocate that capital. All that being said, a trader *earns* money by using their reasoning mind to the problem of the effective and efficient allocation of capital to its most productive use whether the trader holds a position for 10 years or 10 nano-seconds. Further *trading* (regardless of what is being traded) is the act of exchanging value for value with a willing participant by mutual agreement and to mutual benefit. As such trading is one of the most moral private human actions that one can undertake. Best, -B

Leave a Reply