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Psychology of Stock and Option Investing: Ten Years of Observations


Why do retail investors buy high and sell low? Why do we sell our winners and keep our losers? Why do many of us feel that the market is rigged in favor of Wall Street insiders? Boy am I starting off on the wrong foot with this article! I’ll do my best to finish on a positive note.

I have been self-investing with stocks and stock options since the early 1990s but the concept of the Blue Collar Investor was realized and launched ten years ago. During the past decade I have had the honor and good fortune to communicate with thousands of retail investors from all over the world. There are several common psychological aspects to retail investing that I have made mental notes of over the years and will share with you in this article. Since I am not a psychologist or a psychiatrist I prefer to frame these as observations rather than facts you should take to the bank.


Why do retail investors buy high and sell low?

I see greed and fear. A stock price is accelerating exponentially. We want in, so shares are purchased without proper due-diligence. When price declines, panic sets in and shares are sold as there never was a viable exit plan. The conclusion is that the system is rigged.


Why do retail investors sell winners and keep losers?

It feels good to win and lousy to lose. When we sell a winner for a profit we feel great…let’s call our best friends and let them know. Our losers…well they’re not losers until we sell them, right? Let’s hold them until the price goes back up. Well how about Enron, WorldCom, Tyco, Bear Stearns…..where’s that exit plan when we need it?


Why don’t many retail investors achieve consistent success?

Let’s start with the above two paragraphs and move on from there. Here is what we want to hear: “You can achieve huge success for little risk and little effort. Just send  your check to….” Human nature is such that many of us are looking for that “free lunch” but it simply does not exist. One of my favorite TV programs is American Greed, a show that depicts anti-social criminals who take advantage of unsuspecting hard-working people…you know, Bernie Madoff types. This show never seems to run out of material.

Bernie Madoff

Trust me…I’ll make you rich!


Why is it so difficult for retail investors to decide on a particular strategy?

I’m going to share two observations for this one before we get into solutions:

1- Premature excitement– Once learning of a particular strategy many retail investors get way too excited and want to start immediately before developing the skill set necessary for success. Education is critical and so is paper-trading (practicing) for a few months.

2- Strategy overload– We learn of five strategies and attempt to master them all. We end up okay at all five but master of none.


Plan to counter negative psychology

I will never stop saying this: Our investment strategies must be crafted on non-emotional decisions and based on sound fundamental, technical and common sense principles. We must master all the required skills necessary for success. For covered call writing and put-selling those skills are stock (or ETF) selection, option selection and position management. All three must be mastered before risking even one penny of our hard-earned money. Once mastered, practice trading comes next and then we will have years and decades to benefit. The plan requires us to know why we enter a position and how and when to exit it. Emotions are not part of the equation.


Psychology to sell losers

It is true that until we sell our losers, those losses are not yet “realized” Is that a reason to allow them to depreciate even further? Of course not. If we think about this scenario, it is not the stock but rather the cash we have invested in it that is important to us. In reality, we could care less about that security. The question we should pose to ourselves is “where should I place that cash at this point in time to give me the best chance to make a profit?” In that stock or another? In many cases we will “realize” the loss, keep the loss to a minimum and move the cash to a better-performing equity.


Which strategy should be adopted?

Needless to say, I am biased towards covered call writing and selling cash-secured puts. I have employed many strategies over the years and these are the ones that have worked best for me and my family. They may or may not be right for you. By educating yourself and paper-trading you will be able to make the appropriate decisions. Whether you use the same strategies as I do or others, it is critical to trade non-emotionally and to have a sound system in place that we have confidence in. It will require some time and effort but will be well worth it as we become CEO of our own money.



Successful investing must be non-emotional. There are no free lunches (ignore those 3 AM infomercials). We must master one or two strategies and depend only on ourselves for success. At the very least, we should be educated to the point where we can evaluate the job an advisor is doing for us. By developing a non-emotional plan based on the required skills for elite investing we will expedite our goals to become financially independent and ultimately CEOs of our own money.


Are you paying trailing commissions for your mutual funds?

(Off topic but important to many retail investors)

These are additional fees paid to advisors each year an investment (such as a mutual fund or variable annuity) is owned. In theory, it is incentive for an advisor to review our investments and provide advice. In many cases, it is simply an additional debit from our brokerage accounts that many retail investors aren’t even aware of. I also have concerns regarding potential conflicts of interest. Is an advisor incentivized to keep us in products that generate an annual income for the advisor rather than moving us into a better investment? Typically, trailing commissions can range from 0.25 – 0.50% per year, a significant debit. Ask your advisor if you are paying this fee or check the fund prospectus under “management fees” It is our right and obligation to our families to ask these questions even to ethical advisors who are working for our financial best interests.


Upcoming live events

December 1, 2016

Blue Hour webinar 3: Registration now open and free to premium members

Thursday at 9 PM ET

Premium members login and scroll down on the left side as shown in the screenshot below (top screenshot). General members can purchase a seat at the Blue Collar store as shown on the lower screenshot:

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Event information and registration can be accessed at these links.

December 6, 2016

Options Industry Council Webinar Summit

Tuesday afternoon…1:30 Pm ET:

Register here

Those who register but cannot make the live event will be sent a link to the presentation recording.

February 27, 2017

Stock Trader’s Expo

Marriott Marquis Hotel, NYC

1:30 PM ET

Exhibit hall Booth 208 (February 26th – 28th)…come say hi to the BCI team


Market tone  

Global stocks declined this week on concerns regarding next Tuesday’s US presidential election. Volatility, as measured by the Chicago Board Options Exchange Volatility Index (VIX) jumped to 22.51 from 15.25 a week ago, as a result of those pre-election anxieties. Oil prices fell this week on doubts that OPEC will be able to reach an agreement to limit production and on a large rise in US crude inventories. This week’s reports and international news of importance:  

  • US nonfarm payrolls rose slightly less than expected in October, adding 161,000 new jobs, but upward revisions to the prior two months’ data was a positive in the report
  • The report also reflected a 2.7% year-over-year rise in average hourly earnings, the fastest pace since the global financial crisis. This enhanced the possibility of the Fed hiking rates in December
  • The Federal Open Market Committee left rates steady at its November meeting but hinted strongly that a hike is likely at the December meeting
  • A wild and unpredictable election campaign comes to a close next Tuesday with opinion polls showing a tight race. Hillary Clinton looks to have an easier time achieving the 270 electoral votes needed to win the White House
  • The battle for control of the US Senate looks to be very closely contested
  • The Institute for Supply Management’s manufacturing PMI rose to 51.9 from 51.7 while the eurozone PMI grew to 53.5 from 53.3 the month before
  • On Wednesday, credit rating agency Moody’s warned that it may downgrade the UK’s sovereign credit rating if it loses access to the EU single market as a result of Brexit
  • On Thursday, the Bank of England held interest rates steady but played down the likelihood of further interest rate cuts because the economy has performed better than members of the Monetary Policy Committee expected in the wake of Brexit
  • After overcoming last minute objections from Belgium, Canada and the European Union signed the Comprehensive Economic and Trade Agreement. The deal will eliminate 98% of all tariffs between Canada and the EU and is projected to increase trade between the two by over 20%
  • The largest one-week build in inventories on record, combined with fading hopes that OPEC will put in place significant production caps, helped push oil prices to their lowest levels in over a month



  • Eurozone retail sales data are released on Monday, November 7th
  • The US general election takes place on Tuesday, November 8th (finally over!)
  • The European Commission updates its economic growth forecasts on Wednesday, November 9th
  • China releases new loans data on Friday, November 11th

For the week, the S&P 500 declined by 1.94% for a year-to-date return of +2.02%. 


IBD: Uptrend under pressure

GMI: 1/6- Sell signal since market close of October 12, 2016

BCIUPDATE: With the FBI Director re-opening the case regarding HRC’s emails, the polls have tightened and the US and global markets have reacted with concern. This is not a political commentary but rather a financial observation. The polls still favor a Clinton victory but this election season has been full of surprises so who knows. As a result, I have decided to close my current stock/option positions over the next 2 trading days and move into cash until the election passes and the market makes a statement. I am not suggesting what others should  do but rather sharing what I am doing and why.


The charts point to a bearish outlook. In the past six months the S&P 500 was flat while the VIX rose by 45%.


Wishing you the best in investing,

Alan ([email protected])


About Alan Ellman

Alan Ellman loves options trading so much he has written four top selling books on the topic of selling covered calls, one about put-selling and a sixth book about long-term investing. Alan is a national speaker for The Money Show, The Stock Traders Expo and the American Association of Individual Investors. He also writes financial columns for both US and International publications along with his own award-winning blog.. He is a retired dentist, a personal fitness trainer, successful real estate investor, but he is known mostly for his practical and successful stock option strategies.

19 Responses to “Psychology of Stock and Option Investing: Ten Years of Observations”

  1. Jay November 5, 2016 12:00 pm


    Thank you for this insightful article. I have cut and pasted it into a side file of pieces of investing wisdom I come back to when I get lost and off track. And, like Garfield the Cat used to say, “I resemble that remark” on every observation you made about retail investors :)!

    Friends, I have only used the “straddle” tactic a couple times but Tuesday may be a good time to try it again sensing a big election reaction in the market. Any of us with options clearance in our IRA or cash accounts can do it with a small amount of trading “fun money” to play the election.

    Pick a high liquidity ETF: SPY, QQQ and GLD are good candidates. Any stock or ETF you thnk is highly election sensitive will do but I suggest one with high volume because trade will be vigorous Wednesday and you want to close the losing side quickly.

    Near the close Tuesday buy a call AND a put ATM, same strike. Time frame of your choosing. I might buy the Dec expiration to give my winning side a little time but Friday expiration would work too for a fast close either way.

    Anyway, it’s an idea for trading fun: don’t spend much! – Jay

  2. Barry B November 5, 2016 11:21 pm

    Premium Members,

    This week’s Weekly Stock Screen And Watch List has been uploaded to The Blue Collar Investor Premium Member site and is available for download in the “Reports” section. Look for the report dated 11/04/16.

    Also, be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them at The Blue Collar YouTube Channel. For your convenience, the link to the BCI YouTube Channel is:

    Since we are in Earnings Season, be sure to read Alan’s article,
    “Constructing Your Covered Call Portfolio During Earnings Season”. You can access it at:


    Barry and The BCI Team

  3. Jay November 7, 2016 9:45 am

    Good morning everyone,

    Well, the tables have turned a bit since I wrote my comments above. With the FBI clearing HRC once again I am not as excited as I was about the straddle trade for tomorrow. When this latest chapter opened I bought VIX calls and now have to evaluate closing that trade.

    I guess the FBI had gotten jealous of the Fed and said “Hey, wait a minute, we can move the market too :)?”

    It will be a memorable market week… – Jay

    • Roni November 7, 2016 3:55 pm

      Hi Jay,
      The market today is betting against Trump and I sold BGS and CYNO reducing my losses a bit.
      Now i’m 85% in cash, and I doubt that anybody is changing his vote just because the FBI gave Hillary a break.

      Wishing you luck for tomorrow – Roni

      • Jay November 8, 2016 1:14 pm

        Thanks Roni,

        If yesterday and today’s trade indicate what a HRC win will be like people may “regret” their caution closing positions. But that is just the ‘ol greed impulse talking!

        If she wins I’ll be coaching myself to be patient: profits will be taken, there will be dips to buy, do not rush back in buying the first big up days. In fact wait for down days and sell OTM cash secured puts to re-enter positions at a discount then get back in the call selling business.

        If Trump wins cash will feel like the greatest holding on earth – well, maybe other than GLD which will spike! I’ll be telling myself: let the market wash out, look for when support levels start to hold again. Then start selling cash secured puts to re-engage the process.

        Anyway, my two cents 🙂 – Jay

        • Roni November 9, 2016 3:59 pm

          Hi Jay,

          Now Trump is elected, and the market is closing at + 260 points ??
          Strange, very strange.

          Once again this is proof that nobody can forsee the future, so we always must play it safe.


  4. Emily November 7, 2016 12:12 pm

    Thank you, Alan, for your timely insight into the volatility. I closed all of my positions today, and I enjoyed the nice bump today as well. You were correct concerning the Brexit reaction. I heeded your advice and navigated around it with a nice profit. I am trusting that holding mainly cash will be better than the potential downside over the next few days/weeks.

  5. Alan Ellman November 7, 2016 2:02 pm


    I never give specific advice but always happy to share what I’m doing and why. Like you, I’m happy to pocket today’s unexpected bump and will craft a plan moving forward once the market establishes its post-election position.


  6. Joe November 8, 2016 12:44 am

    Thanks. That is a great article.

    I am trying the first strategy (OTO) with eTrade and it will not let it go through if I do a market order for the Options portion. I get this error: “Market orders must be placed as day orders. If you wish to place a market order, please select Good for Day as the term.”

    I am setting an OTO to sell the underlying if it drops 11% which would trigger a buy back of the options at the market rate.

    Have you bumped into this restriction?

    • Alan Ellman November 8, 2016 6:48 am


      Brokerages are concerned about litigation and their required adherence to the KYC Rule (know your customer). It appears eTrade if forcing its clients to re-evaluate positions on a daily basis. Consider setting a limit order on the short call side (I use the 20/10% guidelines described in my books/DVDs) and ask for email, notification if executed. If the short call is bought back, you can sell the stock, roll down or wait for a bounce back to re-sell the same option. If you have my books or DVDs check out the exit strategy chapters.


  7. Adrian November 8, 2016 12:53 am


    I want to ask you again about the well known ‘RS line’ that I have been using in my analysis.

    – As I had preferred to use the RS-line to compare the stocks performance to the market, and as you also would only look for candidates beating the market, then do you think I should only buy stocks where the RS-line is either Uptrending or moving Up/s-ways, – but not S/ways alone? (otherwise the stock would not be worthy of buying as it is only equalling the market performance?)

    Most of my better results I have noticed have come from stocks where this RS-line has not trended just S/ways. Thanks

    • Alan Ellman November 10, 2016 3:17 am


      Comparing the price performance of a stock to a market benchmark like the S&P 500 can be a useful tool. I do not use the RS -line but I would certainly favor one uptrending and consolidating. Keeping in mind that I do not use this tool, my sense is that if the market is uptrending and the stock or ETF in question is also uptrending to the same extent, it still may represent a useful underlying depending on other screening factors. I encourage our members to use the technical indicators that work best for them…they may or may not be the same as the parameters I use. That said, there is no one tool we should hang our hats on. If we use the RS-line, it is part of a mosaic of screens we use to determine which underlyings deserve to be part of our current portfolios.


  8. Alan Ellman November 9, 2016 5:13 am

    Election: One man’s opinion:

    The surprise Republican sweep has left half of us elated and half of us frightened. As investors, we should be neither. Non-emotional investing is the key to successful investing. There will be near-term volatility in our markets initially due to the uncertainty of a Washington “outsider” leading our great country. The markets will then settle down to a norm and then we can craft our investment plan. We have so many tools at our disposal to invest defensively or aggressively depending on the statements the markets make post-election.

    The challenge pales in comparison to what many of us went through in 2008. We invest in corporations that will continue to make money and that may be difficult to embrace in what many will view through a post-Brexit-like initial market volatility. From there, opportunities will present themselves.

    I am currently 100% in cash and looking for the most appropriate re-entry point. Elation or fear will not be part of that decision-making equation.


    • Roni November 9, 2016 4:06 pm

      Hello Alan,

      so true this your post.
      I’m also very happy with my 85% cash position.

      I am trying to kill the emotional trader in me, but it will not die.


      • Alan Ellman November 10, 2016 3:36 am


        We can all relate. Once I realized how much better my bottom line results were by eliminating fear and greed, emotions were no longer a part of the equation and I became a much better investor. Here’s an analogy that comes to mind:

        I’m not a big fan of casinos from a money-making perspective since for every dollar we give them, they give us back less. However, I have friends and family that do enjoy the excitement of playing slots/table games so I take one for the team and go along. I play blackjack and memorize the computer cards…given my 2 cards and the dealer’s one “up” card, what is the best play? Now, if the dealer shows an ace and I am sitting with “16”, I’m in big trouble. The computers may say that if I take a card I have a 4% chance of winning. If I don’t, I have a 3% chance of winning so I take a card. Others may fear going over “21” so they stand pat…emotions playing a role. By sticking to the system and in ignoring emotions, results will be better in the long run.

        As an aside, when we sell covered calls or puts, we are the casinos whereas the option buyers are the players. Selling options does not guarantee success for every trade we make but does increase our chances of winning.


        • Roni November 10, 2016 12:31 pm

          Thank you Alan,

          I think I’m starting to master these emotions and become a better covered call trader.

          Cheers – Roni

  9. Jay November 9, 2016 10:16 am

    Well said, Alan.

    I was certainly wrong in my estimation of how the market would digest a Trump win – at least so far! And biotech is throwing a party today over HRC going away :).

    But the sun did indeed come up this morning, it is not the end of the world as we know it and, as always, opportunity awaits those with the patience and level headedness to find it. – Jay

  10. Adrian November 10, 2016 6:06 am

    Alan, I have just sent you a reply email with a different calculation result than before, and I’m pretty sure it’s correct – if you could just tell me what you think as soon as you can.

    Also above I had asked again about this popular RS line indicator. You can give me some shorter answer if not sure.

    I want to ask about the RSI next too, – there is some contradiction to it from what these articles have gossiped of it! Thanks

    • Alan Ellman November 17, 2016 7:49 am


      The RS Line indicator compares the price action of a stock to that of the S&P 500. As I’ve mention on this site in the past, I do not use this indicator but feel it has value for those who do. We use fundamental and technical analysis along with common sense screens (like minimum trading volume) to paint a mosaic for eligible securities and one technical parameter like the RS Line or the 4 that I use are a small, but important, part of that analysis.

      Those who use the RS Line look for bullish signals like breaking out from a base or making new highs. Some draw trend lines to detect bullish/bearish signals (breaking out above or below trend lines).

      I have had consistent success using the 4 parameters detailed in my books and DVDs but encourage our members to add/delete/replace with parameters that have worked well for their particular trading style. My way isn’t the only way.