John Locke – Option Trader Interview Series

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by Gavin in Blog
October 9, 2013 4 comments

Today, we have the first in interview in the Option Trader Interview Series and we’ll be hearing from John Locke. John is a disciple of Dan Sheridan but also cut his teeth with Optionetics, Steve Nison, Ken Calhoun. He now has a number of courses available through SMB.

John is a pioneer in the options education field and has developed numerous strategies including the bearish butterfly, M3 and ROCK option trading systems.

Let’s hear from John:

When did you first get started in the trading business?

I started trading in 2006

Can you remember your very first trade?

Yes, it was buying PCLN stock. Happened to be a great long term trade but it was a completely random purchase.

When did you first realize that you could become a full time trader? What gave you the confidence to take that step?

After trading the market neutral strategies I developed through the 2008 crash and the record rallies in 2009, it seemed that trading anything else would be easy at that point. The experience gave me the confidence that it was possible.

A lot of people want to become full time traders, how much base capital is needed to trade for a living?

It depends on how much money you need in order to live, build your account and build your savings at the same time. It also depends on how much savings you need, how good a trader you are and how much risk you want to take.  In my opinion, an excellent trader needs a $100,000 “account” to make $5000 a month, however, if you only have $100,000 you should NOT be trading this large as you would have an extremely high risk of ruin. Your trading account should consist of money that, if lost, would not devastate your lifestyle.  Therefore, in my opinion, a trader should have a minimum net worth of $1,000,000 before trading a $100,000 in order to have a reasonably low risk of ruin.  Don’t get me wrong, I’ve seen people trade all their money and “make it” but they did so at great risk to their lifestyle. They just happened to be lucky enough to make enough money before that inevitable losing streak had a chance to bankrupt them.  Unfortunately, I’ve also seen people, good traders, trade all their money and lose it.

What psychological challenges are involved with trading full time?

Now you’re talking my specialty, I am a success, business and trading psychology coach/mentor, certified in NLP, Neurolinguistic Repatterning and Hypnosis so I deal with a lot of psychological challenges, particularly as it relates to businesses and trading.   Full time trading is “just another business”.  A trading business comes with all the stresses and challenges of any business.  One of the biggest challenges to becoming a full time trader is transitioning from a “paid employee” to a self employed business owner. Business owners have money at risk and need to plan for normal business cycles. This means that they will have times where income and profit are great as well as periods of draw down, sometimes for extended periods of draw down, which eat significantly into their working capital.  And during this drawdown time, business owners must continue to work at the things that made them successful even though the business may not be making money for them “right now” and they must be confident that, over time, the business will be successful. In other words, it is not a steady paycheck; the work does not always produce instant gratification and sometimes you need to work for extended periods of time with a negative cash flow. Traders who do not understand this often see their savings dropping and mistake a “normal drawdown period” for a system that does not work and panic, often scrapping or drastically modifying a perfectly good strategy or even worse start taking on too much risk, becoming too risk averse or start jumping at any strategy that “seems to be working at the time” which usually results in the trader blowing up and going back to work.  So the biggest psychological challenges revolve around poor planning, unrealistic expectations and the need for instant gratification.

As a traders’ account size grows, small percentage movements suddenly have a large dollar impact. All of a sudden a 5% loss is the equivalent of buying a new car. How did you manage this transition?

Correct, and this is a very big psychological issue as well because if the dollar amount scares you, you will make poor decisions, often creating a loss that otherwise may not have happened. To fight this I did a few things. First I scaled up slowly, only small increments at a time. Second, I would only scale up directly after a loss or a trade that drew down near my loss numbers so that the prospect of losing that much money was fresh in my mind and I knew I could handle more. Third, I would take the amount that a max loss would create out of my account prior to placing the trade so I could literally see what that would do to me and make sure I was OK with it prior to placing the trade, which also has the benefit of showing you what you will have left to trade with if the loss occurs.  Once you trade at a certain level and take a few losses, you get used to it and it is not an issue any more.

What is the most important trait of successful traders?

The ability to choose a trading style/system, modify it to fit your needs and stick with it until you get it.

A lot of people struggle with discipline, have you got any tips that you would like to share?

I find that most people struggle with discipline when they are unsure of what to do or have unrealistic expectations. In other words, they do not have a clear goal and therefore cannot know what to do OR they have a clear goal that is not realistic (possibly given their current skill level) and do not know how to create it. In reality, it is not a struggle with discipline when you don’t know what to do, it is a struggle with poor planning and unrealistic expectations such as thinking you can predict random events or never have draw down periods, etc . I find that proper planning and realistic expectations “cure” 90% of my client’s so called discipline problems. As for the other 10%, that gets more involved.

What is your number #1 trading rule?

Always be prepared to take your maximum acceptable loss on any trade you enter.

What did your trading education entail?  Did you have a mentor that guided you in your trading?  If so who was it, and how influential were they?

I started knowing nothing about trading in 2006. I learned most of how the markets and options work through Investools.  I continued my formal education with Optionetics, Sheridan Mentoring, Steve Nison, Ken Calhoun and many others. I have also read many books on the subject. For the most part all the above was very educational but the process of becoming profitable; I had to figure out on my own.

How would you describe your trading style?

I mainly sell premium using complex options spreads. I would describe my trading as “hands off” as I do not typically sit and watch the market all day.

What analytical tools do you use in your trading?

I find OptionVue to be the best analytical tool for the type of trading I do.

Can you share your trading results for the last few years? How did you fare during the financial crisis?

Since I sell services and products, I cannot share specific results.

The type of trading I do handled the financial crisis quite well. It was definitely an interesting time with lots of learning moments.

Are you willing to share your worst trading experience?  What happened and how big was the loss?

You mean like buying something you though you sold and going off for the day.  Actually, that didn’t turn out too bad but it could have.

The worst thing that happened to me is in the early days when I had a large butterfly position on Costco that I was willing to take a 30% loss on. The stock had a large gap and I had an order in to sell the butterflies at “market”.  Well “market” happened to be a debit and I ended up losing more than I could have lost if I stayed in the position and took a total loss and as an additional kick in the pants, the position would have been profitable if I held it.

With the advent of electronic trading, improved technology and tighter bid ask spreads, retail traders are now able to trade strategies such as iron condors that were previously unavailable to them. Given that iron condors will suffer heavy losses during market panics; do you think large numbers of retail traders (typically the weak hands) using iron condors poses a systematic risk to the overall market?

I don’t think they pose a risk to the market but they certainly think they pose a risk to themselves.

You created the Bearish Butterfly and M3 strategies for SMB, can you me about them?

The Bearish Butterfly is a strict guideline based strategy that does well in bearish and volatile markets with the ability to “usually” work out in bullish markets. It was an awesome trade for the financial crisis and has been a great trade over the years.

The M3 is a concept based trade that was developed to help traders learn how to be in the marketplace without taking on excessive risk. In other words, it is designed as a teaching tool. The trade uses loose guidelines to make sure the trade does not get too out of whack but leaves a lot of flexibility for the trader. It is a trade that performs very well over a wide variety of market conditions but does best in a more volatile environment. Many people who use the system are very happy with the results and use it as their primary trade even though it was not initially intended for that purpose.

Both trades, although traded successfully by many traders as standalone systems, are part of a bigger system which will be introduced later this year.

They seem to be very strict rules based strategies, do you have any flexibility with the rules?

I do not believe in strict rule based systems except for beginners.

Anyone who wants to take trading seriously and trade as an income source, needs to actually know how to trade and adapt positions to deal with the changing market conditions; otherwise they are setting themselves up for failure.

A perfect example are all those rule based iron condor traders that decided to go into business in 2005, 2006 and 2007. The strategy worked great in that environment but when the environment changed in 2008, they did not know how to trade and therefore could not adapt resulting in major losses and going out of business.

You may have noticed the word “guidelines” in the trade descriptions above. The Bearish Butterfly does have specific guidelines for beginners but you will find advanced traders, will trade it around market conditions.

The M3 does not have strict guidelines.

Is there anything else you would like to add?

We are here to help you become successful in all walks of life!

Thanks for your time John.

If you’re interested in making money. Joy Wallet has some interesting ideas on how make $5000 a month.
  1. The Lazy Trader says:

    Great work! I have been waiting these interviews with special interest!

    1. Thanks for the feedback Lazy Trader, glad you’re enjoying the interviews so far.

  2. Option Oz says:

    I have seen John’s presentation earlier and it had a good trade setup. This interview portrayed the missing link: trader’s psyche. Thank you for highlighting it and sharing with us.


    1. You’re welcome Option Oz, thanks for reading

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Options Trading 101 - The Ultimate Beginners Guide To Options

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