How do you know if you really understand something? When you can teach it to your wife/husband, on their terms.

This is Part II of “Can you teach?”, featuring: your wife/husband.

Last week we paused the Daily News on the following question: Can you explain how your system works to your wife/husband?

One of the main characteristics of a successful system is that it is teachable. In other words, you should be able to easily teach your system to whoever wants to learn. It should be easy to explain its concept, procedures and final goals.

Below, we have a fictitious conversation between a husband and a wife, where he tries to explain his (fictitious) credit spread-selling system:

– Honey, you’re always talking about your system. Can you explain it to me? How do you make money with it?

– (a drop of sweat pours off his forehead) It’s simple: I sell insurance contracts on the market every month. It’s like running an insurance company: people are afraid of losses that come from the prices falling, so they buy insurance from me. (explain the Naked Put: check).

– Oh, I see. But what if everything goes wrong and the price indeed falls? I understand they are insured, but what about you?

– With the credit received from the insurance selling, I buy my own insurance for each position. In case everything goes wrong I’m also insured. (explain the Bull Put Spread: check).

– Hmm… And if nothing wrong happens?

– I keep the money the client paid me and sell another insurance contract the next month.

Set up your system in a way you can explain it. This is one way to master your own craft.

Chart of the Day: S&P 500

A Bull Put Spread on the S&P 500 ETF (SPY) explained to his wife.