I remember talking to my good friend Brian last July, a few months before the "Great Crash of 2008". Brian was (and I emphasize was) a "traditional" investor. He had a diversified "portfolio" of stocks, managed by a professional "investment advisor". I, on the other hand, was then and still am a humble trader in options, with no long term holdings, who uses an online broker.

Anyway, Brian related to me that he was having a dispute with his "investment advisor". He felt the market was getting a bit turbulent, and he wanted to sell all of his positions and go to cash. His broker disagreed. She felt that it was still a good time to hold a diversified group of high quality stocks, particularly those that would not be affected by the brewing crisis with the banks.

Brian is big (or maybe, was big) on trusting his professional advisors, so he let her have her way. Four months later, his portfolio was decimated, and he went to cash with what was left of it. That's where he sits as I write this article - the bleeding is stopped but the blood loss is severe, and there's no apparent way to replenish the "blood". His retirement hopes have pretty much been dashed.

A Formulaic Approach to Trading

I've just never been much of a believer in "playing the market". Maybe the reason for that is I never figured out how to make it work. Actually, perhaps I did, although what I'm about to say is meant to be "tongue in cheek": If you want to make money watching me trade stocks, just watch what I do, and do the opposite. If I buy XYZ stock, you should short it. If I short it, you should buy it. Looking at my history in traditional stock investing, a person could have really done well following that strategy!

However, I've long been absolutely fascinated with options. The fascination was, at first, with the notion that you can buy an option for a few pennies, and a few weeks later it's worth many dollars. That actually happened quite a bit during the "dotcom" era. These days, it's mostly fantasy.

But what really fascinated me was the idea that there must be a way to, somehow, mathematically "beat the system". I mean, options have all those "Greeks"; they have spreads that vary widely with market conditions and the number of a particular option that is traded; and you can do all of those crazy combinations of buying and selling, long and short, one against the other. With stocks, you buy or sell, long or short, and that's it. With options, the combinations are limitless. Surely there's a way...

And, in fact, there are a number of "systems" you can use to make your fortune. Just go to a search engine and type in "option trading strategy" and most of them will appear before your eyes. I've subscribed to many of these systems, and I've taught the strategies. And, under the right circumstances, some of them can work well. Problem is, circumstances change, and what works well one month, or one year, can wipe you out the next while you're not looking.

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