"All courses of action are risky, so prudence is not in avoiding danger (it's impossible), but calculating risk and acting decisively. Make mistakes of ambition and not mistakes of sloth. Develop the strength to do bold things, not the strength to suffer." -- Niccolo Machiavelli, The Prince
These are wonderful thoughts to hold in your mind if you think of trading as being a very risky proposition. Just about any aspect of our lives have risks involved, so is option trading risky? Of course it is, especially if you're a novice and don't quite know what can hit you. Just like driving is risky if you never drove before. The key is in calculating your risk, and acting upon it.
Start small, start with a paper account, but above all, START. It is far riskier to live your life wondering "what if"... Worse yet, to rely on someone else to take care of you money, your investments, your future. As we move out of 2009 and start 2010, decide what you'll pursue, how much you know and need to learn, calculate your risks, and go for it.
This is how I navigated the past year, since July 2008 the market started becoming very much risky for non-directional traders. I had decided I would pursue this style of trading and once committed, I couldn't just walk away and wait for better times. My decision was to scale back in my position sizing, and trade, test and learn the various strategies, see how they'd work out, see how they'd could be shredded to pieces if I was to trade them without a stop, learn, adapt, learn some more, but keep walking on the path.
Even though I ended up negative in 2009, I was down by less than 1.5% in my entire portfolio. Should I have kept on trading the same way I used to back when I had just started trading options (back when I knew close to nothing about options), I'm 100% sure I would have been wiped out at least a couple of times between July 08 and December 09. I learned to trade non-directional options strategies by adjusting the greeks and using risk management. I discovered what strategies I'm more confortable with, and I'm sure that I can keep on this path in 2010.
So, this is something I want to leave behind as we turn the page for the year. Manage and calculate your risks, and act upon it.
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4 comments:
Those are great statements!
Happy New Year!
and here's to profitability in 2010!
Gustavo,
Thank you for sharing your thoughts. I have been following your blog and trading along side you. I am sure this is a great tool and diary for you. And it is an invalueable learning tool for us novices who are struggling to trade, learn and employ risk management strategies in these turbulent markets. What a time to learn options, but I am staying the course. Your blog gives me so much inspiration Gustavo to keep going.
Do you hedge your portfolio in any way for black swan event? Some insurance of any type to sleep better at night? I continue to hear that hedging is a good idea but I do not know the ways we can hedge with our non directional portfolios i.e. condors, iron butterflies, calendars.
Happy new year, and profitable and successful trading
Bob
Thanks! I appreciate hearing your comments. It is always good to know I'm not all alone out there. So thanks and let's get it on 2010!!
Bob, as far as hedging is concerned, I employ some simple process:
1) First there are the contingent orders, I place them in all my positions, and try to stick with simple orders (i.e. buying a long contract to hedge the position in case the market moves too much, or an order to close a single spread). I try avoiding complex orders as contingent, such as buying an entire iron condor in one order, those might not get filled.
2) Second, and this is in case of major emergency. There is capital allocation. I never tie up too much of my capital at once.
So, worst case scenario? Let's say something major happens, the market crashes down beyond all my short and long strikes (I don't sell naked) AND none of my contingent orders are filled AND the stock market shuts down beyond an expiration cycle. For such an event, I'd lose all I have allocated for the positions, this would never ammount for more than 30% of my trading capital.
Not to mention, the third condition (A major crash where the stock markets would not re-open untill the expiration cycle is over) would unlikely affect all my positions, as I'd have already been peeling some of my trades off the table, and I very often exit all my positions before the expiration week. For example, the current MNX position is in countdown mode, I might start peeling off spreads starting Wednesday, as expiration week is fast approaching.
You always have to wonder and consider such an event, and the impacts in your overall ability to continue in the business.
Gustavo
Thanks Gustavo for your thoughtful comments regarding hedging! Sage advice indeed.
In doing more research, I have found that some traders buy far out of the money puts on indexes such as SPY as insurance for a black swan type event. Also, broken wing butterflies to the downside with modest debits (i.e. .20-.30 cents) and protection if a huge downside correction.
It is frightening to think one could lose all in the worst case scenario you mentioned. Trading smaller and capital preservation is key.. live to trade another day.
Cheers,
Bob
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