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mastering the market

Unfortunately, I forgot one thing: I needed to eat and pay the rent without the benefit of a consistent salary. Finally, the day came when my landlord (one of my partners) came to collect my rent and I had no money to pay it. I hedged as best I could and asked him to give me a little more time. He turned me down, adding that he was going to throw me out regardless of how much money I made him in the past. I was shocked. At first I thought he was kidding around. But with a stern look on his face, he proved me wrong, stating unequivocally, One day you will thank me for teaching you this lesson. At the time, I cockily replied that Id be much happier with a wheelbarrow full of money. In hindsight, I realize that he was probably referring to my favorite personal proverb about finding inspiration in adversity. However, he is still waiting for me to thank him.

Crushed and downhearted, I went to my parents to borrow money to eat and live. Being a Harvard MBA and having to borrow money from your parents is very demoralizing. Having to listen to Why dont you get a real

job? not only from them but from others made me decide to give corporate life another shot.

Soon after, I found a consulting job that lasted a whole 30 days. It was supposed to be a permanent job. But as I was being fired, I was told I had the wrong attitude. In fact, they said much more than that, but most of it could never be printed. Unfortunately, they were right. I did have the wrong attitude. I just didnt want to work for anyone but myself. I returned to real estate and started looking for new projects, but this time I was determined to control them. In this roundabout way, I was first introduced to the concept of an option. A real estate option allowed me to control a piece of property with very little cash for a specific period of time. As I later learned, stock and futures options are very similar.

My first deal was exciting. I found a great apartment complex going into foreclosure and convinced the owner I could buy the property. In fact, I had no cash at all. Even worse, my credit was destroyed and my shiny BMW had been repossessed. Since I was approximately $50,000 in debt, I did what I had to do: I convinced an investor to put up the option money and split the profits after the property was sold. I made a nice $35,000 profit on that deal-finally, a success.

After a series of profitable deals, the bottom fell out of the real estate market. There was no money available anywhere. Once again, I was left with a big question mark as to what I should be doing with my life. Luckily, serendipity intervened. One day, I received a small advertisement in the mail for a book on futures trading. Although I had no clue as to what futures trading was all about, I ordered the book. What struck me most were tales about making large amounts of money in a short period of time using very little cash. This sounded very similar to what I had been doing with real estate.

Why had I never learned any of this when I attended Harvard Business School? How could the great boot camp of capitalism neglect to teach me about futures markets? My interest was now piqued. I picked up a few more books. I began to watch the markets. I even played with a few introductory strategies; but although I found them interesting, they were not very profitable. My first big mistake was to convince my investment partners that we should begin trading by hiring experienced professionals. In less than 30 days, these so-called professionals lost about 30 percent of our capital. This was an extremely poor way to inspire confidence in my investors. I decided to fire everyone and learn to do it myself. I knew that I could lose at least 30 percent without even trying (even more if I really tried). I was determined to make a profit, and the trick was to get a competitive edge. That much I did learn at Harvard. To be successful, you need to have an edge.

I began to analyze where I could find this edge, focusing my attention

on using computers to garner information faster than others did. I gained experience as a trader, even learning how to write my own computer programs. Eventually, this long and eventful journey gave birth to Optionetics. Today, I teach this system to individuals all over the world. Hopefully, this book will enable you to develop a better understanding of the markets and will assist you in learning how to profitably trade. In my opinion, there is no better lifestyle than that of a successful trader.

George A. Fontanills Miami Beach, Florida December 2004


Iattribute my success as a teacher, trader, and businessman to the incredible support I receive each and every day from my friends, family, and colleagues. I am fortunate to be able to do the job I enjoy with some of the most extraordinary people in the business. I would like to thank everyone at Optionetics who has helped to build our company into a global one. Your hard work and team spirit allow me to do what I love to do: trade options. Without you, this book would not be possible. You are all simply the best. In particular, and in no order of importance, I would like to especially thank the following people:

Tom Gentile is the Chief Trader for Optionetics. I would like to thank him for contributing a lot of great material for the second edition of this book. We work so closely together as a trading group that I often cannot distinguish my original ideas from Toms. Simply stated, Tom is a trading genius, and his nickname the option guru is well deserved.

Richard Cawood is the CEO of the Global Group and Optionetics and the mastermind who perhaps maintains the lowest public profile of our group while having the highest influence. I am very fortunate to have his business acumen leading our team. The success of our full-time trading endeavors is made possible only because Richard manages our business. And with that I have to acknowledge his right hand, Tony Clemendor, an old friend and groundbreaking COO. My partners-Tom Gentile, Richard Cawood, and Tony Clemendor-are the backbone of the company and deserve the bulk of the credit in building our company.

In addition, I wish to recognize Amy Morris, who has been with us since we started. Without her dedication and inspirational management skills, my life would be much more difficult. And of course, I send waves of gratitude to Kym Trippsmith, my Editor-in-Chief. Her resourcefulness, hard work, and determination are the reasons this book-as well as all the others-exist. Thank you, Kym!

My thanks also go to my trading family, writers, and friends. In particular, Frederic Ruffy and Jody Osborne are two of the most outstanding writers I have ever had the pleasure of working with. Their timely revisions

to this edition of The Options Course were invaluable. Finally, I want to thank Kim Diehl, the Associate Editor, for her eagle eyes and editing acumen. There are many others and I hope they forgive me for not being able to list everyone.

My loving family has supported me in all my adventures over the years. I thank them for always believing in me even when I didnt believe in myself. When my battle with cancer occurred, they were always at my side and their prayers were answered with my recovery. I thank God for my second lease on life.

People continually ask me why I publish material. For the record, I enjoy passing on my knowledge to others. However, without my team supporting me, I would probably stick to trading full-time for a living. Thanks to the help of my incredible support team, I am able to do both of the things that I love: trade and teach.

Finally, I would like to thank my students, who inspire me to keep writing and publishing. Over the years, we have made numerous friends and received many great ideas from our students that have enhanced our own trading. I look forward to meeting you someday at one of my many speaking engagements or at an Optionetics seminar coming to a town near you. Until then, good luck and great trading.

G. A. F.

About the Author

Having struggled to overcome a life-threatening illness as a young man, George Fontanills is a true believer in the idea that pursuing your dreams is something that should never be put off until tomorrow. Like many people, George followed the typical educational and work-related path: From high school he went to college, and from college to an accounting job at the prestigious firm of Deloitte, Haskins Sells. Upon receiving his CPA license, George started work with Andersen Consulting. Not quite satisfied with where his life was headed, he left this job to attend Harvard Business Schools MBA program. After receiving his MBA, George decided to get off the treadmill of unsatisfying jobs. In the face of several high-paying job opportunities, George decided that he needed to start his own business. His first business failed. Undaunted, he started a second business that never left the starting gate. A survivor, he kept going. Running low on money, George became a real estate investor buying property with no money down. Finding a business he enjoyed, he quickly began to build a successful track record and increase his net worth. Just as he began to feel that he had found his lifelong career, the bottom fell out of the real estate market-strike three.

As George pondered his next move, he received a brochure on making money in the markets. After ordering the book, he began trading . . . and losing money. Rather than concentrating on his own losses, he began studying successful traders to see what they were doing differently. Using the analysis skills he developed at Harvard, George conducted a comprehensive investigation to determine what differentiated the winners from the losers. Risking the money he made in real estate, George tested his conclusions, eventually developing a unique approach to trading that involved utilizing

managed risk strategies to strategically attack any market. By mathematically controlling risk every time a trade is placed, consistent profits can be made without the stress of unbridled losses. Fontanills called this trading style Optionetics. As his net worth soared, he gained a reputation as an expert in nondirectional, managed-risk trading and has become a well-respected teacher and speaker at trading conferences all over the world. Today, Optionetics offers several of the best-attended trading courses in the world. Georges straightforward and insightful approach to trading has enabled thousands of people to learn how to limit their risks and maximize their trading successes.

These days, Fontanills is President Emeritus of Global Investment Research Corp. and an active options and stock trader. Georges reputation as the dean of options trading has led to numerous guest appearances on television and radio shows across the country. Most recently, he has been quoted in The Wall Street Journal, Barrons, Research magazine, CBS MarketWatch, and TheStreet.com. He also appears on CNBC, Bloomberg, and CNNfn, as well as numerous radio stations across the country. In addition, George Fontanills has written two best-sellers, The Options Course and Trade Options Online, and co-written with his partner, Tom Gentile, two others: The Stock Market Course and The Volatility Course. These definitive guides to trading have added to his critical acclaim as one of the best trading instructors in the world.


Options are one of the most profitable tools available to traders today. They offer traders the ability to leverage positions, manage risk, and enhance returns on existing portfolios. To those who choose to trade options, this book provides the practical knowledge- from basic concepts to sophisticated techniques-necessary for successful options trading. It is designed to provide novice and intermediate traders with methods and strategies that will enhance profits and manage risk more effectively.

The investment world has gone through amazing gyrations since the first edition of The Options Course was released back in 1998. We have lived through the boom of the Internet along with the subsequent bust- when the dot-com became the dot-bomb. During this period, fortunes were made and lost virtually overnight. Traders who made money so fast they didnt know what to do with it turned around and lost it so fast it made their heads spin. It is always painful to see how fast investors can lose money-especially when techniques to limit risk could easily have been employed.

In addition to this wild time in early 2000, we saw a precipitous decline in the technology sector as well as in many blue-chip stocks. In the years following the collapse of the Internet bubble, almost everyone lost money. Even people with mutual funds saw tremendous drops in their monthly statements. Meanwhile, many small as well as institutional investors kept betting that the market would rebound, only to see it fall again and again. This continual drain destroyed the confidence of many stock market players.

Conversely, bond investors saw their yields rise dramatically as the Federal Reserve had to keep dropping interest rates. Apparently, the economic slowdown would not halt unless dramatic reductions in interest rates could spur economic recovery. It was a slow process and the American economy continues to slowly recover.

World events have also changed our lives dramatically. September 11, 2001, was one of the most horrific and unforgettable events in the history of humankind. Unfortunately, too many mothers, daughters, fathers, and

sons as well as all the heroes of 9/11 will be remembered in history due to the horrible deeds of a few. As someone who was in New York and saw this event firsthand, I will never forget this day for the rest of my life. This event-along with surviving Hodgkins disease when I was only 18-has led me to understand the importance of living life to its fullest every day. Undoubtedly it has woken us all up; we are now more fully aware of the global scope of the world we live in and the importance of appreciating the gift of life on this amazing planet.

As options traders, we have to focus on the many events that can make markets move in any one of three directions: up, down, or sideways. One of the most vital factors that must become part of your daily market approach is to pay close attention to volatility. How fast can an event drive the markets, and how can we take advantage of this event? What strategies can be employed when historical and implied volatility diverge? Options provide the knowledgeable investor or trader opportunities to create scenarios that others may not see. A stock investor can only buy or sell a stock, whereas an options trader can have a number of different strategies for different time frames. I like to say that we are playing a chess game with the markets. The market makes a move; I counter that move until, hopefully, I checkmate the market.

During the past 10 years of teaching individuals how to make money in the markets, I have had the opportunity to meet thousands of people, and they each seek ways to improve their lives-both for themselves and for their families. I hope that your own personal success will enable you to help your loved ones. Just remember that life is short and there are many roads it may take; but if we do our best to be good to others, then any path we take should also reward us many times over.

I certainly hope this book will help you to change your life in a positive way. The powerful strategies reviewed in it offer traders the ability to consistently make good returns when these trading approaches are solidly understood and strategically applied. Although at times it may seem like an insurmountable task to comprehend all aspects of options, I promise that it is well worth the effort. Just think back at how much time and money you spent in getting to where you are today. A little more consistent time and effort can reward you many times over.

The first question you need to ask yourself is: Why do you want to trade? The most common answer is to make more money. While trading can provide a great living, its important to make sure you love what you do-no matter what it is. This will lead you to become more successful in the field of your choice. Once you have asked yourself why you want to trade, then ask yourself why you want to trade options. Most individuals want to trade options because these incredibly flexible instruments enable traders to control an asset for less money. For example, lets say I

want to buy your house from you one year from today. I am willing to pay you the appraised value today plus another 10 percent on top of that. (If you dont take 10 percent, maybe I offer 15 percent or 25 percent.) Once you agree on the price and I pay you a deposit (known as the premium), I will have an option contract to purchase an asset (your house) at an agreed-to time (one year from today) at an agreed-to price. For this I pay you a premium. This is a simple example of a call option. The buyer (me) will have a right to buy the asset (your house) from the seller of the option (you), who will have an obligation to deliver the option (sell the house) to the option buyer.

If you want the right to sell an asset, you can employ the use of a put option. A good analogy can be the purchase of auto insurance, which provides the right to sell your car (the asset) to the seller of the put (the insurance company) if the value goes down due to an accident. Lets say you purchase a policy that values your car at $25,000 and you pay $1,000 for one years coverage. What you have done is purchased the right to sell your car (the asset) for $25,000 for a one-year period in exchange for the premium of $1,000. If nothing happens in the year, your option will expire worthless and you will have to buy another put option (next years insurance policy).

These relatively simple analogies are the initial steps to managing trading risk and leveraging your capital more effectively. In this book, you can learn how to use these amazing trading instruments in the volatile markets of the twenty-first century.

I have been fortunate to work with some of this countrys best traders. This has enabled me to pass on an abundance of knowledge geared to help people become successful traders. This information comes from years of experience spanning from my first days as a novice trader through my experience running a floor trading operation at the American Stock Exchange and in the Chicago futures pits.

It is my sincere hope that you can learn to develop moneymaking trading acumen by reading this book. Most importantly, you will be able to avoid many of the costly errors commonly made in trading and investing and ascend your own learning curve in leaps and bounds. I have confidence that you will gain significant insight into the world of investing by studying the strategies in this book. By applying this knowledge to stocks, futures, and options markets, I have no doubt that you will find trading a lucrative endeavor.

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