Thoughts on Risk Management

"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.

12/30 Daily Summary

Today's price action happened in the last 30 minutes of the year. There was a big sell off. I was updating one of my tools and thought I had made a mistake when it showed the major indexes had dropped by more then 1 st. deviation.. My first automatic thought was: "oh, did I mess up my formulas??" Then I checked the charts and saw what happened :)

Well, no changes were made on any positions, and I'm glad I didn't jump the gun on rolling the 180 calls on the MNX.

Position's Details and Price Action chart:
12/31 MNX Iron Butterfly

12/31 MNX Iron Butterfly

MNX rolled back down in the last 30 minutes of trading Today. I am glad I still have a bunch of the 185 calls, if I had rolled all of them up, I'd be finding myself worried about the down-side becoming a problem sooner than later. If we keep rolling down, my job will be to sell back the long FEB calls and wait for MNX to find footing under my tent.. If we push higher, then I'll just stick to the original plan: roll the 180 calls and stay in the game.