I’m very picky about option brokers because many of my specific trading recommendations use puts and calls for leverage. Here’s the bad news about that: 99.99% of the brokers I’ve screened for the assignment flunk miserably, since they cannot execute your orders in a way that will leave you with even a prayer of making money.  Ditto for such electronic access programs as RealTick and TradeStation. They appear to have been designed by computer geeks rather than traders, making it far more likely that you will lose money not only because of stupidity, but because of trading “accidents” that could have been avoided. Let me explain.

The key to trading options profitably is the use of “contingency orders.” They differ from limit and market orders such as, “buy six October 40 XYZ calls for 1.30”; or, “buy four October 40 XYZ calls at-the-market.” An example of a contingency order would be as follows:  “Buy six October 40 XYZ calls for 1.30 as long as XYZ stock is trading 38.43 or higher.” Such orders are designed to prevent one from having the calls dumped in one’s face if XYZ stock should plummet unexpectedly.

To follow the example further, the October 40 calls might be an excellent buy for 1.30 if the stock is trading 38.43 or higher. But would you want to buy them if XYZ were to break below that number and keep falling? Of  course not. But if you don’t have a way to get your bid out of harm’s way if the stock hits an air pocket – that is, have a contingency placed on your order – then you are all but guaranteed to receive a lousy fill and be in a losing trade from the get-go.

Dangerous Features

Direct access trading platforms are even worse, as I mentioned above. In fact, they are actually dangerous to the financial health of the trader. Here is why. Most are enabled for “Advanced Order” capability, allowing you to set up an automated trade as follows: “Buy ten October 40 XYZ calls if XYZ stock is trading 38.43 or higher.” Now, the intention of this wording should be quite clear in the light of what I’ve written above. But not to the typical trading platform, which interprets it very differently. In effect, it says to itself, “The stock is now at 39.50, so that part of the contingency, "38.43 or higher," has already been met; now, as soon as the second part is met – i.e., when the options trade down to 1.30 -- I will buy them.”

In other words, the order software isn’t smart enough to link these two conditions together as a trader would; instead, it considers each half as being fulfilled independently. The result, quite often, is that the stock will drop like a stone, and you’ll be buying the October 40 calls when XYZ is trading down around 37 and change, well below the 38.43 target where you'd been looking for a bounce.  

A Geek’s Logic

I’ve explained all of this to product development guys at various trading-software firms, and some of them clearly “get it”. But the fact that they are unwilling to remedy the problem immediately – i.e., to make the order-execution feature think and act with a trader’s logic rather than a geek’s – implies that they don’t care very much about whether their customers make money. Why worry about it, they seem to be saying, when not one customer in forty would even know what a contingency order is?

As for discount and full-service brokers, most don’t even handle contingency orders, since they fear it would drive up their error costs. It’s fine with me if they don’t want to offer the service. But if their customers knew how important this ostensible “frill” was, they would run to take their business elsewhere.

Unfortunately, most customers know absolutely nothing about contingency orders. And that is why, on average, probably not one person in a hundred who has traded puts and calls has made money at it. It is also why Rick’s Picks has been on a crusade to educate options players about how to enter a trade. As far as I am aware, no other guru uses contingencies with option strategies. Without them, though, traders are no better off than the blackjack player who splits fives and never doubles down on an eleven. This is just giving away money in a game that is practically impossible to beat even for those who know plenty of good tricks.

The Good News

Which brings me to the good news: There is at least one broker in America that can handle all types of option orders competently: Benjamin & Jerold, a Chicago-based discounter. They are among the rare few who know what contingency orders are and can execute them without breaking a sweat. And even after providing that crucial, extra measure of service, their commissions are still competitive with fees charged by the 99.999% of brokers who would flunk my test.

If you are serious enough about option trading to think you can make money at it, I cannot recommend Benjamin & Jerold strongly enough. I’ve been trading options on and off the floor myself for more than 30 years and have written The Striking Price for Barron’s on an occasional basis, so you can take it from me: Without contingency-order flexibility, you CANNOT win! Give Benjamin & Jerold's Mark Angioletti a call at 312 554-0202 if  you want to take control of your trades.

San Francisco Seminar

The Hidden Pivot Seminar in San Francisco is a “go,” with only a firm date remaining to be set. As of now, it looks like it will be held in early February, so please let me know via-email  if you’re interested in attending.

The two-day class is geared to teaching traders of all skill levels the rudiments of my proprietary Hidden Pivot System. Post-grad mentoring in a chat-room is included so that students can master the techniques learned in the classroom in a real-time setting.  

A Student’s Experience

Here is what one of my grads, Hunter Reynolds, had to say recently about the chat room:

"We have all come a long way. I think everyone here is making a little $$, or we would be doing something else by now. I can honestly say I am up about ten percent, maybe a little more, since your class.  I am pretty conservative.  I just trade from the long side, but I'm getting really good at picking the hidden-pivot reversal points for the uptrend!"

Dates are not yet firm for a fourth seminar to be held in Sydney, Australia, but it looks like it will take place either in November 2006 or February 2007. The class is filling up, so do let me know soon if you’d like to attend.