Chris Irvin, a 14-year trading veteran of the options, stock, futures and currency markets, is a real-world trader who s determined to help others find their place in the investment world. After owning a successful computer training company for six years he found that the dream of owning his own business rarely involved a good night s sleep. He needed a change. In an effort to find a self-reliant form of income (without relying on managing employees), Chris began trading options in 2000. With his very first trade, he knew that trading was not only the way for him to generate an income, but a way to control his time and spend more of it with his family. After years of going through the school of hard knocks and being left disappointed in the mirage that many so-called successful traders put up, he set out to not only dominate the investment world, but to also help others find the truth about how to they could reach their trading goals. As an international investment instructor since 2004, he has been a go-to contributor and speaker on Traders Television, Trading Views and Ino.com. His ability to trade and teach others garnered him national attention as an All-Star by Trade King in 2011. All in all, trading is a form of opportunity and freedom in Chris s eyes. Trading is a way to be more than just your own boss; it s a way to be self-reliant: which equals true freedom.
Chris Irvin Chris Irvin: For the first question, Chris, can you please tell me what your background is and how you got started trading? Yeah, absolutely. I really didn't spend much time on the floor of the exchange, and I was never a broker. I actually started out as a youth pastor in Colorado. When my wife and I decided to start a family, we realized we would need more money. So, I had to expand away from doing what I really loved, which is working with kids and teaching. I had a few jobs where I was an employee. I was once a registered representative for a while. I also sold mortgages for a while. I did quite a few things before I realized I wasn't a very good employee, so I decided to be an employer. My wife and I started a computer training company for kids and senior citizens. Then I realized that I'm not very good with employees either. So I sold my business and decided to look for something that would allow me to make some money without being an employee or an employer. That s when I got involved with trading options. Okay. Why, well what do you prefer to trade, I think you already touched on that, it was options. But can you tell me a little about what's unique to each market and why you prefer to trade them? Options is my market. The reason I like to trade options is because you have the opportunity to trade stocks that may be well outside your price range. Currently, stocks are constantly going up in value. Apple is trading for almost $600 dollars a share. Before they split, Google was trading for over $1100 a share. For the average person, especially those just getting started, most of the time those kinds of stock prices are just out of line. They can't fathom being able to trade a hundred shares of that. When you trade options you're able to trade those big name stocks or at least take advantage of their price action for pennies on the dollar. So you could trade Google for as little as $20 a share. You could trade IBM, almost a $200 dollar stock, for $5 dollars a share. It really brings it back to a point where the average person can get involved in those kinds of moves. With the leverage that's involved,
you have the ability to make great rates of return. You also get to reduce your risk by not putting up as much money. You can do some pretty amazing things with options that you can't do when you're trading stock or currencies. What style of trader do you consider yourself? I think I consider myself to be more of a swing trader than anything else. That just means I'm going to be in a trade for a period of days. A day trader would be somebody that's going to trade for one day and then out. I enjoy being in a trade for a day or two, and then taking my profits. But that doesn't mean that I don't like to put on a trade that will last a month or two. So, swing trader for the most part but that doesn't rule out the opportunity to put a set it and forget it kind of trade on. What is distinctive about the way that you trade and what makes you successful at it? Well, I feel like I'm successful at trading options because I developed this method of evaluating which option you should be trading called the "DEPOT method." I think one of the biggest problems traders have is they don't know which option to be trading. So, they end up going with the option that is the cheapest, which is typically considered to be an "out of the money" option. There's an old expression, "if you trade out of the money options, then you will end up out of money." So, I've created a methodology that helps you sort through the hundreds of potential options that are out there on every particular stock. Then, it lets you refine those options down into a handful, maybe two or three, that fit the basic DEPOT criteria. From there, people can choose the right option and get set up for the best possibility for success. Do global events affect your trading, and if so, how? Absolutely! Global events have a huge impact. They create volatility in the market. As a matter of fact, right now we're dealing with the situation between Russia and the Ukraine. I think anybody that's paying attention to the market right now realizes that it can be up one day and down the next. This is all because the market does not like uncertainty. That's really what you get when global events
rear their ugly heads, and the market doesn't know how to handle them. What do you do to protect yourself or your portfolio? By trading options, we have the ability to go into a trade for pennies on the dollar. The beautiful thing about trading options is, if you're buying options, you can't lose more than you have in a position. So, worst case scenario let s say I wanted to trade a hundred shares of IBM. Well, it might cost me $17,000 to get into a hundred shares of IBM. But if I trade at the same, a call option on IBM, I'm only putting $500 into the trade, roughly. Because 500 bucks is the cost of one contract trading, 100 share within that contract. So, we actually have the ability to put up a lot less money and reduce your risk. I've learned that we really need to be students of money management. When thinking about getting into an option trade, a lot of people will over-leverage themselves. They'll actually trade dollar for dollar. What I mean is they will take a look at how much it would cost to get into the stock trade $17,000 in the case I just used and they would take that same $17,000 and buy options. Now, they would be controlling far more shares than they would if they were trading stock, and that might be a good thing if the trade works out in their favor. But, if the trade doesn't work out in their favor and it goes against them, then that over-leveraging can just destroy them. So rather than trading in a dollar-for-dollar scenario, I encourage everybody to do and what I do is I trade share for share. So, rather than taking on the risk of the additional shares, I'm going to say, well I was able to trade 100 share for that $17,000, well how much would it cost me to trade that same 100 shares if I was trading options? That brings my cost down and reduces my risk. That's how I manage it. Let's talk about volatility now. What do you like about trading volatility? Volatility could mean that the market is moving up and down quite a bit. That s really what an option trader wants. They want a stock or the market to actually move. Sideways movement doesn't help anybody. But then there's
also something within an options trade that we have to look at. There are two types of volatility one's called implied volatility and one's called historic volatility. When it comes down to option trading, we have to be aware that implied volatility is a market maker putting their own personal stamp or personal opinion on how much that stock is going to move around. When we expect volatility in the market or that the stock isn t going to move, then we consider options to be cheap. But when volatility is high and the market maker decides that they think that there's an event coming up that would cause that stock to flop around quite a bit, then they're going to increase the value or price of that option. So you actually do have to pay attention to whether or not there's increased volatility built in to the option's premium or that option's premium is cheap. So we can look at options from the perspective of being cheap or being expensive and if you're option buyers, it's a good idea to buy them when they're cheap and then move into the expensive part because that's where you profit. Is there anything that's tricky or complicated about volatility? Well, there are some things that you have to learn about options trading. My favorite strategy is called a straddle. A straddle plays right into the middle of an event that's going to cause a stock to move one direction or the other. If you buy a call option and a put option at the same time, then you have one vehicle that will take advantage of a stock moving up and one vehicle that will take advantage of a stock moving down at the same time. Then find the delta in the option, which is the option that works out in your favor. So, let's say that there's an earnings announcement coming up and it s going to create huge volatility in the stock, you could buy the call and buy the put the day before the earnings announcement, and then let the announcement run its course. If the stock pops significantly, and it has to move significantly, then one side of that trade is going to work out very nicely for you. You ll make a lot of money while
the other side actually falls in value. Due to the way the options move, the side that's working out in your favor starts making money faster the more you're right. Whereas the side that's working against you, starts to lose money slower as it moves against you. Therefore, the net between the call option and the put option is what you make in the trade. Ultimately, you're working in an event that you know is going to cause volatility, but you're going to take both sides of the trade and you don't care which direction it goes. That's a beautiful strategy. That's great. Will you tell me what kind of money management techniques you use when placing options trades? First of all, everybody has to understand that we trade share for share, not dollar for dollar like I spoke about before. Secondly, on my option trades, I use something called a contingent base stop-loss. Rather than putting the stop-loss based on the value of the options, I actually put the stoploss based on the value of the stock. Because options are a derivative, meaning they really don't have any value aside from connecting to a stock, I want the value of my option to be based on the movement of that underlying stock. So if I put a stop-loss in on just the option's value, there is some fluctuation that goes on within an option's premium aside from the movement of the underlying stock, and I don't want that to take me out of the trade. So what I do is I put a stop-loss in that says if the stock falls by X then take me out of my option trade. It s an if/then statement and it's called a contingency based stoploss. It s a great opportunity for traders that aren't familiar with it. How important to trading is psychology and can you give me an example of an instance where your lack of control of your own psychology has caused you to lose money? That's actually a great question because, in my opinion, the real key to trading is recognizing what the worst case scenario is in a trade and identifying whether or not you
can live with that worst case scenario. That just means that you know exactly where your stop-loss is going, what the risk in the trade is, and whether or not you re okay with the stock turning around, coming down and moving the value of your option down. In my family we have an expression, "you can either be right or you can be happy." In the market, you have to learn to be wrong and be happy because there's not a trader that's going to be 100% right. You just need to recognize what the worst case scenario is every time you enter into a trade, put the trade on, bracket it, put a trailing stop in, put your contingent based stop in, and be comfortable. You won't need to watch it anymore. Just let the trade run and work out. If it works in your favor, then great. If it works against you, not great. Either way, you're okay with the worst case. Now, as far as a time when I had that work against me When I was first starting out I had a trade on a company called Transocean (RIG). The trade ended up going against me, but I wasn't as confident or aware of money management techniques or the way I should be managing these things back in the day. So, that trade was going against me, and it was going against me big. Ultimately, I was really trading emotionally at that point, so I stuck with the trade as long as I possibly could, but it was crushing me inside. Eventually, I sold out of it and the weight came off my shoulders. I felt so good about the fact that I had just ended it and was no longer in that position. Well the next day, it turned around and went right back up; I would have been in a profitable position if I would have had a game plan and hung in here a little longer. So, money management is a big factor inside your trading plan. What's the best lesson you've learned as a trader? Basically, money management key in any type of speculation. A lot of people get into trades, or trading more specifically, and they think about all the millions that they're going to make, or the cars and the fancy houses and the jewelry and all those things that could come with it.
The reality is even the best traders in the world will tell you the number one thing that you need to consider when you're talking about trading is capital preservation, meaning if you don't have any money you're not trading. The most important thing that you have to do is not lose the money that you have. What's made you decide to become an educator? In the beginning, I mentioned that I was a youth pastor when I was younger. My mom was a teacher, my brother is a teacher, and my wife is a teacher. So, I just come from that background. I really love to be teaching people, breaking down complicated concepts, and putting them together in bite-sized fashion so people can actually understand. Then their eyes light up and I just love that feeling. I'm a big proponent of acronyms to help people remember things. That's why I have that DEPOT method, plus a few others that I've thrown into my training. But I just love seeing people's eyes light up when they finally get something. When I can combine the ability to teach with my love of trading, then that's a great thing for me. Do you have any other acronyms that you can share with us right now? Of course. When we do our technical analysis piece, we talk about different candlestick formations. So, I came up with two acronyms to describe the bullish and the bearish candlestick formations. One was TEMPS, and the other one is STEED. We've got five bullish candlestick formations and five bearish candlestick formations, and the first letter of each one of the formations goes into that acronym. As far as how to remember the critical issues within the candlestick formations, that helps to solidify things in people's brains. I like those kinds of triggers. What is one piece of advice you would give to a novice trader just starting out? Well, you've got to concentrate on money management and developing a trading plan. The number one piece of information that you must ask yourself in your trading plan is What am I willing to accept as my worse case scenario. How much am I willing to lose? Your maximum
acceptable loss is a critical number that you've got to come up with. Start out with the amount inside your trading account, and then figure out what percent of that trading account are you willing to give up in any one trade. A majority of people will suggest that you come up with a maximum amount to put toward a trade; however, I don't think that's as important as what the actual risk to your account is. I've come up with several different types of risks a lifestyle risk, an account risk, and a trade risk. Those three risks have to be dealt with inside your trading plan. As far as lifestyle risk, you clearly can't trade with money that s designated for something else, such as the mortgage or food. Account risk is how much of your account you re willing to lose in any one trade that would go against you. Trade risk is the risk that's inherent inside each individual trade. So, where's your stop-loss going to go and what is the risk inside that trade? Now, the key for every trader is to make sure that the account risk and the trade risk come into alignment. We actually created something called the MTI equity trade map. This method walks people through a process to find out if their risk and their trade match their maximum acceptable risk in their account. If they do match, then you have a potential trade. If you're over-leveraged and your risk is too high, then pass on the trade. What about for an experienced trader, what sort of advice would you give them? Buy "in the money" options. When we look at how most people trade these days, we notice they use their option as a stop-loss. Oftentimes, you'll find that trader thinks if they get into an "out of the money" option trade, then they've got so little in the trade that they're willing to just give the whole thing up in a loss. If the trade goes against them, then they'll just consider that to be their stop-loss. That doesn t make any sense to me. There are reasons why you want to trade "in the money" options. Most importantly, the market maker looks at the option as whether or not that option has the possibility of closing above a strike price at expiration. I think that's a big
mistake for a lot of experienced traders and when I say experienced I don't mean successful. So the final question, can you tell us what's next on the horizon for you? Here at Market Trader's Institute, we ve created the ultimate options course. We launched it a couple of months ago, and it's going great here. We are just going to continue to add to it add additional courses, add additional features and scanners. We're just excited about what's coming up. People are really taking a liking to the options course, and that make us really excited. In this report, you will discover The Depot Method Share-for-Share Options Trading Favorite Options Trading Strategy The Straddle Contingent Base Stop-Loss Candlestick Formation TEMPS & STEED The Three Types of Risks Involved In a Trading Plan MTI Equity Trade Map