It seems that whenever anyone asks me how to do something – anything! – my response is quite often prefaced with “I really don’t recommend this for anyone else but what I do is…”.
Do as I say, not as I do. It’s the chorus of my life. Some of this crazy stuff works for me, it’s just that I don’t recommend that anyone else try it, or at least not without adult supervision. What works for me may not work for you. Honest. (Someday ask me how I decided to retire to Belize. Yeah. Definitely, DON’T do it that way. It worked just dandy for me, though!)
Many times when I watch webinars of other people’s trades, I feel the same way – that what they do is okay for them but not for me. And I have a feeling they’d have the same reaction if they looked at my trades. Trading is simply way too personal to be a “one size fits all” proposition.
Aside from the obvious (Do you prefer day trades or long-term? High risk/high reward or more conservative?), another question to address is HOW MANY trades you want to manage.
I know people who successfully manage a ton of trades each month. They have a combination of different types of trades, adjustment strategies, underlyings and duration. They may mix long and short directional trades. Some of their trades may have complex adjustment strategies and others may be fairly simple. They use complicated spreadsheets and other tools to track everything they do.
I know other traders who have one large trade supplemented by a few smaller ones, either as hedges or to increase their profits. The larger trade may be farther out and more conservative while the others may be more advantageously positioned. The larger may have complicated adjustment rules while the others are more of an “enter and exit” type. Each smaller trade may have a higher potential risk but also higher potential return in an effort to boost overall profitability. Some trades may only be put on when certain conditions are met and otherwise skipped entirely. There are a zillion permutations you can follow under the “one large, few small” trade paradigm.
Or you can do what I do and have one, single, large trade. But please note the original admonition – I didn’t actually recommend that you do this.
That said, let me explain why I do.
I found that I can only manage a certain number of complicated trades well at any given time. Beyond that number, regardless of whether they’re long or short delta, high or low gamma, and positive or negative vega, they’ll all likely need to be touched in an extreme market move or they all end up suffering. Even normal market movement can result in multiple trades needing attention at the same time. By having a single trade on which to focus, everything I do can be as perfect as I can make it. I can be very, very good at MY trade since it’s the only one I manage.
The main reason I do this, however, is because one, single trade meets my financial and personal goals.
But here’s why I really, really, really don’t recommend that you do what I do.
Everyone, but especially beginners, take note: you get only twelve chances in a year to do well. That’s it. If you make ONE mistake, that’s eight percent of your returns. You HAVE to be perfect, each and every month. That’s some pressure. Do you really need that kind of performance anxiety?
Besides the stress, twelve times a year doesn’t give you a whole lot of practice, in terms of actual hours and trades. How quickly do you think you can improve your execution skills when you are only executing trades once every few days or so? You’d better get comfortable with back-testing because it’s the ONLY way you’re going to gain enough skill to become an expert.
Then what happens when you lose? You live with that loss until the next one closes, which may be a full month away, without any other win to comfort you in the interim. There’s nothing to prevent your mind from dwelling on that loss, which, to underscore my previous paragraph, is a full eight percent of your annual trades. Do you want that little black cloud hanging over your head?
Had enough? No? OK, there’s also no other trading income to offset that loss. Are you good at budgeting for those months when you draw down? Or is your landlord going to have to drag you out, kicking and screaming while you yell, “But I just need one more expiration! I can DO IT next time!”?
For me, the answer to all of the above is “Sure! Bring it on!”. For you, it may be, “Heck, no! She’s NUTS!”. (Which, while true, has nothing to do with my trading style.) In any case, what’s important is to ask yourself the question, “HOW MANY trades do you want to manage?”
If the answer is “one” and, despite all of my warnings it works for you, great. If it doesn’t, what DOES work for you and why?
Contributed and written by Cynthia Sarver, Successful Options Trader of the Month – February 2016