Show of hands - full time traders

[OptionGal]

After much thought and indecision (Should I? Can I really pull this off?) I am finally going to quit the day job and trade full time. I've considered it for years, but wasn't well enough capitalized until this year. Since November 2007 I have been able to consistently generate monthly returns greater than my salary at the paying job.

Now that I've decided to take the plunge, what's the next step? One of my biggest concerns, besides being able to make enough to live on in addition to the house payment, has been taxes. I've already started research in this respect and have come across Robert Green's firm. I've read his book and attended some of the conference calls and am leaning in this direction. Does anyone here use them? Any testimonials, good or bad?

I'm hoping to have all my affairs in order to be able to make the transition at the end of the year; I figure that's a good breaking point (no messy partial W-2).

I guess a lot of my questions revolve around treating trading as a business. I'm curious to hear from those of you who do it have managed the whole process of becoming their own boss. I am open to all suggestions and would love to start a discussion on this topic.

Also, many thanks to chinigun for his thoughtful post http://www.insanemoney.com/forums//s...3&postcount=14

I believe this was the trigger that made me realize that this is finally a possibility for me!

OG

[Whiskeywoman]

Good for you, OG! I wish you the best of luck!

[chinigun]

Originally Posted by OptionGal

Also, many thanks to chinigun for his thoughtful post http://www.insanemoney.com/forums//s...3&postcount=14

I believe this was the trigger that made me realize that this is finally a possibility for me!

OG

Hi OptionGal,

Thank you for the humbling words. I have to say that it is a great privilege that my story was able to provide you with the catalyst for you to take action in achieving your goal of becoming a full time trader! (Magic does happen on these boards!).

As for the next step, I can't help you with the tax part because I'm in Oz although I am trading under a LLC to reduce my taxes (as a flat 30% tax applies rather than our progressive personal income tax - which is one of the highest in the world). However, because the tax laws are different in the U.S. its probably best left answered to one of the other full time traders based there. In terms of having enough to live on, you will probably be able to work that one out for yourself. Make sure you do a comprehensive budget and have enough saved up such that if you have one of those months where you have a really bad draw down it will not affect your income too greatly.

As a recommendation, I would also apply for portfolio margining if your account is big enough (probably need around 150-200K to be safe as you require a net liquidating value of 100K at all times with TOS). This has helped me reduce my margin requirements considerably as I'm a big index option trader (reduced by around a factor of 4). Of course you have to be careful because portfolio margining is akin to having more leverage and we all know that leverage is a double edged sword. The good thing about it though is that you can have more bullets in the bank for when that really good opportunity comes along. Also trades like the short calendar are much more attractive for someone on PM.

If there's anymore I can do to help, please let me know. Feel free to private message me. The same goes for anyone else.

cheers,

Michael

[Dawn]

Originally Posted by OptionGal

After much thought and indecision (Should I? Can I really pull this off?) I am finally going to quit the day job and trade full time. I've considered it for years, but wasn't well enough capitalized until this year. Since November 2007 I have been able to consistently generate monthly returns greater than my salary at the paying job.

Now that I've decided to take the plunge, what's the next step? One of my biggest concerns, besides being able to make enough to live on in addition to the house payment, has been taxes. I've already started research in this respect and have come across Robert Green's firm. I've read his book and attended some of the conference calls and am leaning in this direction. Does anyone here use them? Any testimonials, good or bad?

I'm hoping to have all my affairs in order to be able to make the transition at the end of the year; I figure that's a good breaking point (no messy partial W-2).

I guess a lot of my questions revolve around treating trading as a business. I'm curious to hear from those of you who do it have managed the whole process of becoming their own boss. I am open to all suggestions and would love to start a discussion on this topic.

Also, many thanks to chinigun for his thoughtful post http://www.insanemoney.com/forums//s...3&postcount=14

I believe this was the trigger that made me realize that this is finally a possibility for me!

OG

Hi OG,

I really hope that you get more answers, because I don't think mine will be adequate. OK, maybe I need to attend a forum or two....

This is a very challenging and very rewarding path. I chose it about 15 months ago. Best decision of my life, despite the really tough markets. Don't expect an easy living though, and don't expect the main street banks to understand your new "job"!

For tax advice and entity establishment, we went with www.tradersaccounting.com. They are competent, but can be slow to answer questions. They will not put you in harm's way from a tax point of view, but it can be frustrating getting someone to answer a minor question. On the other hand, I think their entity establishment (which is what you need to be tax-efficient) and maintenance program (to survive any audits) are very good, cost-effective procedures, with excellent coaching staff. The other thing which was important to me was the ability to set up a company 401k, so that I could use my trading salary to contribute to a tax-efficient pension (I am under 50and don't trust Social Security).

I have read Green's book - it is good but very dry. I have not tried his other services and do not know of anyone who has. I suggest you shop around and be picky. These are tough times and you are the consumer - cash is king!

All the best,

Dawn

[OptionGal]

I've just completed refinancing both my primary residence and my vacation home so there should be no occasion for main street banks to be concerned about my job title or financial situation anytime soon.

My account is ~300K so it looks like portfolio margining is a good way to go. I'm usually pretty conservative, mostly index options, but it would be good to have access to more leverage should I need it.

I am going to form an LLC entity in the coming weeks (we should have a naming contest ). Green says this is an absolute must to be taken seriously and avoid undue scrutiny when filing taxes. I'll also look into tradersaccounting.com, thanks Dawn!

I really appreciate the encouragement. I've participated on many trading forums, but I have to say this is probably the most knowledgeable, no-nonsense group I've ever come across. I look forward to learning from and contributing to the enlightening discussions here.

OG

[Dawn]

Hi OG,

Before you leap, make sure you know what you are doing and whether it is right for you!

We have an LLC which holds our trading account. That is all it does. We also have a c-corp. David and I are owners and employees of the c-corp. Our C-corp makes all trading decisions, is responsible for educating its employees and mangaes the LLC. It pays us salary and benefits and a 401k. The LLC can't do that for us in the same way. The c-corp makes various expenses easy to deduct. LLCs may not. Please get educated on the business structure before you commit - this is like marriage!!! It may not be for life, but it is long term, and if you get it wrong, it can be extremely expensive, messy and difficult to get out of it.

Just another point of view. We haven't had a bad experience, but I have talked to others who wish that their trading entity(ies) had been set up differently to address their specific needs.

Warmest regards,

Dawn

[Dawn]

Another thought...

Your LLC and/or C-corp will need bank accounts. Try to get these set up before you leave full time "traditional" employment. We finally went with WFC (we have a mortgage with them any way) and they have been great. We tried another bank (CNB) before them who was terrible and rejected our business account on the grounds that trading is not a legitimate business. We have also heard that BAC doesn't like traders. Watch out, it is not that easy to get this stuff going sometimes!!

Regards,

Dawn

[OptionGal]

Dawn,

Wow, I hadn't yet thought about setting up regular bank accounts for the entity. It totally makes sense though, as I will essentially be paying myself a salary. This is exactly why I wanted to talk to those that have already done it. I'm sure I would have gotten this information eventually but, like you said, it could have come too late and been messy to fix after the fact. I will definitely ensure that I understand the whole business structure before I jump.

All of my trading capital is in individual accounts; my TOS account which is where I actively trade, and a small amount at optionsxpress which I've kept there just for access to their tools. I realize that I will have to open another account under the entity, once established, and move the funds there. Looks like I've got a lot of work to do in the next 3 months!

How long have you been trading through your entities? Has the IRS ever questioned your structure or invited you to elaborate on your returns?

Thanks for the great advice!

OG

[MatthewHaley]

You are getting a lot of tax advice, and that is great. What I am doing for taxes is different, and I would find a professional you like and trust and do what they say. This is not a do it yourself type of decision. There was a very recent (August) Tax Court decision that went against the traders as they hold some trades too long to be considered traders. The penalties are very high for that. The fact that they did over 25 trades a month for over 3 years did not matter.

I do NOT mark to market, I do taxes on a cash basis instead.

On a different part of being professional, there are things you need to address that may not be obvious.

I would get a home equity line set up if you can. Getting cash in a hurry can be problematic with trading and liquidity issues.

Our family's health insurance is $2900 a month. It was only $400 when I was under COBRA, and I didn't get a quote before leaving. While that is not a problem, for small accounts it could be.

I could not find a decent Long Term Disability plan, you may or may not be able to do that. I have some extenuating circumstances that impact that perhaps.

You are now doing retirement planning as well as job and income planning on your own. Make sure your retirement plan is reasonable. It is easy to start trading with a reasonable amount, grow it, but never set some into a separate acount WITH DIFFERENT RULES! I strongly believe your retirement money needs to be managed differently than your income producing money. Like Dawn, you can set up an individual IRA and then trade it. Just ensure the rules are what you want to use for retirement.

Figure out and set up a plan in case something happens to you. I had a brain anuerysm a few years back, that was the driver to get out of the working world. If I had another one, my wife knows exactly who she would call and the other parties have authority to trade my account. My rules for each account are well documented for what should be done upon me being incapacitated. The rules are different after day 5, and then again after day 30 and then again if I am dead.

Make rules for how you are going to continue the studying and learning, as well as when you will close the office door and walk away. I only play with Futures and don't trade currency directly because I can see myself waking up to see the first hour London market status. Or some other silly thing.

I have also set up guidelines for what I want to learn outside of trading, how much time I want to donate, how much money I want to donate.... All the things beyond trading.

I have been doing this full time only 3 1/2 years. At first I tried to be unemotional. Later I learned my emotions help me in a trade. Understanding my emotions was important, not controlling them. If I can't celebrate the new experiences, then I should not have this as a job. My first 6 figure day was huge. My first quarterly tax payment with 6 figures. Having a yearly tax bill of 2 commas is big. I know it sounds wierd to celebrate taxes, but you only pay when you make, and it strips out all the ways you can con yourself into thinking you are doing well when you aren't. I want to get to 2 comma tax bills quarterly, but I am not there yet. I never want to pay too much tax, but some is good. And more is better...

I am looking forward to a certain sized profit day, and that will mean a celebration for the whole extended family. They don't know it yet. But my 275th monthly anniversary is coming up and I hope to make one by then. (I know it is corny, but we celebrate every month in some small way.)

Good luck in your trading travels. As I sign in another place,

Trade well, have fun, give back,

Matt

[OptionGal]

Matt,

Health insurance is definitely a concern, as is disability insurance, long-term or otherwise. Until I got older, I never appreciated the benefits offered by a "traditional" employer. Now that I've had occasion to use them (more and more it seems), I realize how crucial it is to have a health plan. I have a chronic condition and could not afford care without insurance. I've already set up a life policy that is not tied to my employer and I barely squeaked by the physical

I appreciate you sharing your personal situation. The job I am leaving is in the medical field and I see every day how precious life is, but it is also a constant reminder that I need to do this for me, while I can. Working for someone else has me frustrated as now I know I can do better, without the travel and the 14 hour days.

Why do you use cash basis instead of MTM? Doesn't the wash rule make this a nightmare for you? Do you have yourself set up as a business entity or are you trading as an individual? Regardless, it sounds like you are doing very well at it. I can only hope to have a two comma year!

OG