So you’re trading options. Congratulations! You’ve taken an important step to building wealth. The real question, though, is are you running it like a real business or treating it like a hobby?
(WARNING – I was in a bit of a snit when I wrote this, after hearing WAY too many complaints about trading issues that would have been easily solved if the people had actually been treating it like a BUSINESS, instead of a fun hobby. So this post is probably rated at least PG-13, if not R. If you get offended, it’s your own fault – you’ve been warned.)
Note that there’s absolutely nothing wrong with trading as a hobby! It can be a fun, productive, brain-engaging pastime that has the potential to make money. If you know it’s your hobby, and you’re keeping your trading size under control, feel free to skip this blog and re-read your favorite past one.
However, if your livelihood depends on trading, then it should be run as a business. That’s what I want to address here.
Here are a few questions that may help you decide if you REALLY have a business:
- Do you have a legal business entity?
- Do you have a written business plan?
- Do you track and report your results regularly?
- Do you have the best toolset?
- Do you have backup plans and redundancies?
- Do you have the latest and greatest of everything?
These seem like fairly simple questions but they can actually be rather complicated. Ready to delve into them? Are you SURE you want to do this? Remember, you’ve been WARNED (all caps). Okay, then. Grab a soothing beverage and let’s chat.
Let’s start with the first question: Do you have a legal business – Corporation, LLC, Partnership, etc.? In the eyes of the IRS (or your local taxing body), this helps constitute a real business. In that vein (because who DOESN’T love the IRS and want to make them happy? Be sure to register for “Options Traders Tax Tips” scheduled for September 28, 2016 at 1 PM EDT)…
- …are you MTM (and know if / why that makes the most sense for you)?
- …do you understand the tax implications of 1256 contracts?
- …is your accountant well-versed in all of the latest legal trading tax issues? (Because, after all, what matters is not what you make but what you keep.)
How about the second one – is your business plan written and not just in your head? Would you open ANY type of business without a well thought-out business plan? Would you put your hard-earned money into a business without seeing projections, cash flow and other standard business documents? If your answer is, “Of course not!” it may be your business; if your answer is, “Sure, why not?”, then let’s be honest – it’s your hobby.
Third – Reporting on results. Do you have standard reporting on a regular basis? Do you have a monthly or quarterly report that you produce? How do you track your results against projections? Do you analyze them and match profit and loss, relative to your goals? What’s your plan for when you don’t meet your goals?
Moving on to number four – whether you’re using the best toolset. Here’s where I may sense some discordance in the ranks. If you’re running your own business, you get the very BEST tools for the job, yes? OK – what does “best” mean? No, it’s not the prettiest or the most expensive or the easiest to use; it’s the BEST. If the BEST requires some time to learn or is a little painful to use, you suck it up and use it anyway because it’s your BUSINESS. Business isn’t supposed to be simple otherwise we’d have more CEOs that are monkeys. (I’ll just leave that low hanging fruit out there for you.)
Fifth main point – backups and redundancies. I hear a lot of people say they don’t need to worry about backups or availability because their files are stored “in the Cloud”. Uh huh. And it’s IMPOSSIBLE for Google drive or wherever to be hacked or inaccessible because, you know, it’s GOOGLE. (Or Microsoft, or Amazon, or your favorite provider.) If you’re willing to assume that risk, no problem, there’s nothing wrong with storing your files there…if they’re somewhere local, too.
And what about redundancies? Do you have a UPS? How about another computer ready to go in case yours goes belly-up? What about a backup Internet provider? A carrier pigeon? Anything? No, nothing? In that case, ask yourself, “What would happen to my current trades if I couldn’t touch them for the next few days?”
As for the final question – whether you have the latest and greatest of everything – this one was actually a trick question. In my opinion, you SHOULDN’T have the latest and greatest of anything, unless it’s been completely tested and has been out for a while. Is running a beta version on your trading platform really good business practice?
Let’s put it this way – if your business were life-saving equipment (say, that ventilator that’s keeping your lungs going), would you really want unofficial, incompletely reviewed, thoroughly untested BETA software running it? Because, you know, it’s MICROSOFT and they don’t make mistakes any more than GOOGLE does. (Please note that “beta software” is not the same as “beta testing.” Beta testing is a very helpful thing to do for companies as long as you aren’t using it OTHER than as a beta test. You still use your production version to make real trading decisions while you compare it to the beta version.)
There’s a lot to think about before answering those six questions. If ALL your final answers were something like “Of COURSE!” (except for the last question), congratulations, you are running a business.
But if you answered even once something like, “Sure, why not? Winging it is FUN!,” then here’s wishing you the maximum luck and enjoyment out of your hobby.
Written and contributed by Cynthia Sarver, Successful Options Trader of the Month – February 2016