I remember my first Investools class. My pencils were sharpened and my mind was open. It was a big day. I was about to be given the map to the holy grail of financial freedom. By lunch break, I was bursting at the seams to tell someone all about that beautiful trade with the funny name, the iron condor. What a trade! It makes money when the market goes up, down or stays where it is. By the afternoon coffee break, I had another trade under my belt. It was called the calendar spread. The name didn’t sound so cool, but I was told it was a “more forgiving” trade, which sounded nice. By day two, I was hooked. No more buying and selling of stocks.
By day two, I was hooked. No more buying and selling of stocks. It was all about options. By day three, I was drinking the kool-aid and wanted more. It was then when I turned to the guy next to me to tell him how amazed I thought the three-day session had gone. He just looked at me with an ho-hum look and said: “This is all horse manure.” Talk about shattering my new little world. When I asked why he thought that way, he said he preferred to trade one underlying and that’s it. He basically day traded IBM since he used to work there. That made perfect sense to me at the time as he had a good “feel” on the company. Since I didn’t have a “feel” for anything, I gravitated over to my new found friends: the iron condor, calendar spread and diagonal spread.
Fast-forward to a couple of trading months later and I found myself not so enamored with the cool sounding trades anymore. And that “forgiving trade”…it was like watching the Sound of Music…without falling asleep…in French. Trust me, you don’t want to do that. Day trading IBM sounded more appealing, but I didn’t give in and decided to stick with the options world. Over time the names of the options strategies would change to names like Big Lizard, Straddle, Strangle, etc, but it was when I found the simple sounding trade called the M3 that I thought I had finally found the answer.
If there were ever one trade that could handle it all, it was the M3. Those were my thoughts then and are pretty much how I feel today. Why? When you can get solid returns with lower draw downs versus the “other” known trades, you can call it the hammer. If you could have only one tool in your toolbox, the M3 could be that tool.
This brings us to the theme of this blog. Can a trader have just one hammer in their trading toolbox and be successful? We know it can get the job done, but can we do better? This is a question all traders ask themselves as market conditions change. So, what’s the answer? You will have to figure that out yourself, but I’ve found a few nuggets that have helped me. Check out John Locke’s interview called “Is My Trade Broken?” if you are a member of SMB’s Options Tribe.
In addition, Andrew Falde spoke about how the combination of bullish and bearish strategies is optimal to just putting on one strategy over time. That’s the key point…over time. The equity curve will not only be steeper but also smoother.
What am I doing with this new perspective? I’ve started to incorporate the Bearish Butterfly into my trading. Combining that trade with the M3 certainly provides a powerful punch to any portfolio. If you aren’t sure, back test it and discover the pros and cons yourself. One of the hardest things I found was trying to figure out how much capital to allocate to this new trade, which is still work in progress.
Investools? I often wonder what I would tell myself if I could go back in time for just five minutes and talk to my old self on that first day of trading education. I think I would say: “Don’t get caught up in all the names. Keep it simple. Back test any idea you hear here. Most importantly, you see the guy next to you. Short what he trades. Oh yeah, when your wife asks you which movie to buy in French for the kids on November 8, 2015, run.”
Contributed and written by John Wilson