At the Trading Triangle in Maui…oh, wait. No. Sorry. Habit.
In one of the recent Locke Options Community Premium PLUS Skype chats, we were discussing how to improve execution. As you would expect, there were many excellent suggestions, starting with how to estimate pricing. We all agreed accurate pricing ability was critical but opinions on how to get better fills diverged after that point. Some people like to move smaller numbers of contracts at a time, others liked to move large chunks in a single order. Some people adjusted at the same time each day while others tried to time their adjustments. Some leg into the butterflies and long calls while others enter all at once.
Any of these techniques will work…as long as you’re good at them. There are a lot of cautionary tales out there, though, that underscore one thing: If you take a more aggressive approach (legging in, timing adjustments, etc.), you better be right much more than you’re wrong, otherwise you are continually bleeding off profit.
Halleluiah to that! I know. I used to try to time the entry of my long calls that hedged off my butterflies. I’d fight for the price of the butterflies, sometimes getting a really good price only to watch the entire position slowly slide underwater as the price of the RUT kept zooming up. Sadly, unhedged butterflies were NOT what I intended to be trading.
I realized that I just wasn’t good enough at timing the market to get the long call at a lower price. I didn’t have the stomach for drawdowns or the confidence in my technical analysis skills to GUARANTEE it was going to reverse so that I could pick up the call cheaper. Instead, I decided to fight for the price of the butterfly and then just get into the long call.
Yes, sometimes I absolutely ate it on the price of the long call but guess what – I didn’t care! I made so much profit in the butterfly that the long call didn’t really matter to me. Sometimes I’d be better and sometimes I’d be worse but at least I’d eliminated the possibility of ALWAYS being worse, which is what seemed to happen when I was legging in.
Essentially, you’d better be good, otherwise you’re just making your trade worse.
Now, you may be asking yourself, “But what if I’m no good at this? Does this mean I can’t be a successful trader?” Don’t worry! It’s not necessary! If you’re not good at pricing and execution, there’s a secret ingredient to prevent you from getting slaughtered each and every time. Ready?
Consistency is key. If you keep trying to get better executions and you’re just not that good at it, chances are that you’ll carefully adjust at the WORST possible time each and every trade. How do you fight that? By making your adjustments at the same time each day. You won’t always be right but you won’t always be wrong, either.
Sure, there will be times when you make your adjustments and then the market reverses, and you would have been better off waiting. When that happens, keep in mind that you never expected to be right every time. If you’re consistent, when you analyze your results you may very well find you net out making better adjustments.
That’s one of the beautiful features of the M3 in particular: It’s overcapitalized so you can give up a little on your adjustments and entries while you’re learning to be good, and STILL make money.
John gave the best summary for this whole discussion when he wrote, “But of course, if something is working for you, then keep doing it.” And that’s really the point: If you’re GOOD at it (whatever IT is) then keep doing it.
But if you can’t be good, be consistent.
Written and contributed by Cynthia Sarver, Successful Options Trader of the Month-February 2016