Ancient Chinese philosophers realized that with great danger often comes great opportunity. This nexus is further reinforced by the fact that the Chinese character representing both danger and opportunity is the same. Remember that only those who possess and use the necessary skills to survive the period of great danger are in position to profit from great opportunity. Risk control is paramount. - The extrinsic (time) component of the option premium goes to zero at options expiration. Always.
- Although statisticians would argue, the probability of occurrence of an extremely unlikely event is much greater if you “bet the farm” on the event not occurring. Never forget that black swans do exist.
- The human brain is not inherently logical. It evolved for survival and is prone to make erroneous assumptions and draw incorrect associations. To guard against these potentially costly errors, continuously challenge your assumptions.
- Absence of proof does not constitute proof of absence.
- Thinly traded options are usually characterized by egregious B/A spreads. You may be able to negotiate acceptable spreads to enter the trade. You will not be able to do so if you need to exit. It is usually better to stay away from these snares.
- Option orders executed as spreads always receive better fills than individually placed orders.
- Failure to consider current IV in an historic framework for the particular underlying will usually cost money.
- Failure to follow predicted changes in volatility prior to a known event (e.g. earnings) indicates there is some factor of which you know not. When discovered, it usually impacts your position negatively.
- Failure to use and understand option modeling and option modeling software puts you at a significant competitive disadvantage to other participants in the options market. The only thing more expensive than having appropriate tools is not having them.
- It is stunningly easy to “roll more than you can smoke”. It is usually disastrous to attempt to smoke all you rolled if you find yourself in these circumstances. This is another reason to model trades and crisply define risk.
- If you create multi-legged option beasts by manually entering the orders as opposed to entering from a graphical presentation, you will enter positions incorrectly and end up “upside down” and commit other similar errors more often than you thought possible. You must monitor the magnitude of extrinsic value when short options are ITM. Failure to do that and considering your trade plan in light of these developments, will result in unanticipated early assignment at the most inopportune times. Option positions can be easily adjusted to improve their structure only before they enter the ICU.
- Forgetting to honor time stops when holding certain varieties of option beasts can be as costly as forgetting price and/or P/L stops.
- Good traders know what they know; great traders also know what they don’t know. (more…)
Archives of “black swans” tag
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Ancient Chinese philosophers realized that with great danger often comes great opportunity. This nexus is further reinforced by the fact that the Chinese character representing both danger and opportunity is the same. Remember that only those who possess and use the necessary skills to survive the period of great danger are in position to profit from great opportunity. Risk control is paramount. 9 Trading Rules
1. Move: Always be flexible. The beauty of the stock market is polygamy is perfectly acceptable. Never get married to a particular position or a particular strategy. The market is complex, dynamic and always changing. Learn to change with it if necessary.
2. Plan de Vida: Always invest with a plan. Have strict rules and a machine-like approach.
3. Downshift: Pulling yourself out of the game when you’re not certain will help you from making debilitating mistakes. When in doubt get out.
4. 80% Rule: Never let more than 20% of your portfolio put 80% of your portfolio at risk. Position sizing is key to risk management.
5. Hope is a 4 letter word: Holding and hoping is not a strategy. Cut your losses, learn from it and never look back. Never ever get into something you can’t get out of.
6. Understand your risks: You can’t avoid black swans, but they don’t have to rip your face off. Understand your risks and your rewards.
7. Goals and accountability: Set goals and keep track of your performance. You are responsible for your own decisions. Own your mistakes.
8. Psychology: Learn to control your emotions and understand the emotions of those around you. Always remember what General Patton said: “if everyone is thinking the same then someone isn’t thinking”. Also the famous Buffett quote: “Be fearful when others are greedy and greedy when others are fearful.”
9. Your Tribe: Always remember that there is more to life than investing. Don’t live to invest. Invest to live. Being the richest man/woman in the graveyard is worthless if there isn’t anyone to bury you there.
China – The Mother of All Black Swans
9 Trading Rules
1. Move: Always be flexible. The beauty of the stock market
is polygamy is perfectly acceptable. Never get married to a particular position or a particular strategy. The market is complex, dynamic and always changing. Learn to change with it if necessary.
2. Plan de Vida: Always invest with a plan. Have strict rules and a machine-like approach.
3. Downshift: Pulling yourself out of the game when you’re not certain will help you from making debilitating mistakes. When in doubt get out.
4. 80% Rule: Never let more than 20% of your portfolio put 80% of your portfolio at risk. Position sizing is key to risk management.
5. Hope is a 4 letter word: Holding and hoping is not a strategy. Cut your losses, learn from it and never look back. Never ever get into something you can’t get out of.
6. Understand your risks: You can’t avoid black swans, but they don’t have to rip your face off. Understand your risks and your rewards.
7. Goals and accountability: Set goals and keep track of your performance. You are responsible for your own decisions. Own your mistakes.
8. Psychology: Learn to control your emotions and understand the emotions of those around you. Always remember what General Patton said: “if everyone is thinking the same then someone isn’t thinking”. Also the famous Buffett quote: “Be fearful when others are greedy and greedy when others are fearful.”
9. Your Tribe: Always remember that there is more to life than investing. Don’t live to invest. Invest to live. Being the richest man/woman in the graveyard is worthless if there isn’t anyone to bury you there