- I believe that successful options trading requires a different mindset from the traditional “rules of success” for most directional traders in stocks and futures products.
- First and foremost, I believe you need to take profits early and often. We’ve all been hit over the head ad nausem about the old maxim “cut your losers short and let your winners run.” This is a truth I believe holds true for most directional traders, but I don’t believe it holds any currency with consistently successful options traders.
- Speaking of direction, I believe nobody knows the next direction the instrument you trade will move. Nobody. Plenty have ideas and hunches, and often they’ll be right. But the truth is, a coin flip has nearly identical odds. This is why I trade options positions that either don’t require me to guess a direction, or provide me with plenty of opportunity to make money even when I’m leaning in the wrong direction.
- Immediately contradicting the item above, I believe in fading moves (especially, violent down moves). The best traders and investors are willing to put on positions the majority of market participants find hard to put on due to fear. Since the majority of market participants are net losers, I’ve got to find more opportunities to join the minority.
- I believe in contradictions. I believe in breaking the rules. Rules are guidelines, nothing more. Nobody got ahead in this world by following the rulebook and not daring to make mistakes or look like an ass from time to time.
- I believe in getting paid to wait. Time is money. Wherever possible, I want to have positive theta on my side. The odds are with me whenever this is the case.
- Speaking of odds, I believe in frequent trading. Common wisdom wants you to believe that “over-trading” is the common cause of death for most retail trading accounts as commissions steadily drain your account. In many cases this is true (especially if your commission rate is obnoxious). But for me, I’m putting on trades with the probabilities in my favor. The more instances of opportunity I can get myself into, the more the law of large numbers and favorable probabilities will materialize to my bottom line.
- In order to trade frequently, I believe in trading incredibly small so that I can spread my opportunity across as many instruments as possible, diversifying my risk. Call me “One-lot Seany.” I’ll proudly wear that name tag.
- I believe that volatility retraces from spikes or reverts to the mean much quicker and predictably than most would have you believe. Thus, I believe in selling fear. Fear subsides.
- I don’t believe in stop losses. I believe in adjustments. Options trading gives you, um…. options. When positions go against me, all is not lost. Often times, there will be plenty of opportunity to roll strikes to collect additional credit which improves my odds of success, or roll positions out in time to in effect “buy myself more time” for the trade to play out.
- The reason adjustments work: I seek to enter credit spreads when volatility is elevated (see #9 above). Therefore, if my position is getting tested on the upside, volatility will likely be shrinking which further aids my short volatility position. If I’m getting tested on the downside, volatility is likely remaining high (or increasing!) which gives me more juicy premium to sell into, which then results in collecting more cash and effectively lowers my breakeven points on the downside, thus improving my odds of success.
- I believe in net market neutral exposure for my portfolio.
- To help achieve neutral exposure, I believe I should always have a short delta (but positive theta — paid to wait) position in the general indexes. Since the majority of my individual positions will be short volatility and benefit from a stable or slowly rising market, I need to have short index positions which will benefit when markets are receding and volatilities are rising.
- I believe in making stocks and markets work to beat me. They will win from time to time, but they will have to earn it with outsized moves. If the stock or market is too lazy to come get me, I’ll gladly collect its coin and move on to the next trade.
- I believe the only true edge in any marketplace is Buying Power.*
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