Learning Options not Strategies

From the Journal of a Stay-At-Home Trader: Struggles on the Journey

When I was newer to options trading, I studied just about every strategy I could get my hands on. Most people who touted a particular strategy had wonderful win records and promoted dreams like, “Make money easily in your sleep! Wake up every single day with $5,000 more in your trading account! Learn my secret strategy that makes this all possible!” Probably the most common lure was a certain proprietary twist on credit spreads. Maybe these people really did wake up with $5,000 more in their trading accounts every single day. And maybe they didn’t. But what they never talked about was the risk involved with many of their strategies.

Through the years, I tried some of these strategies. And a lot of times, they actually worked. Until they didn’t. So I’d look for another strategy. And the search continued. At the time, I never understood why the strategies stopped working. But that is because I didn’t understand why they were working in the first place. I had no idea how to troubleshoot when they went wrong.

It was quite a revelation to me the first time I heard Dan say, “I don’t teach strategies. I teach options.” To be honest, I wasn’t really sure what he meant. But it was certainly the first time I had ever heard anything like that.

Over time, I came to understand his words. What I learned from Dan and John was:

  • How to better read the current market and individual underlyings

  • How to better interpret charts in multiple timeframes

  • How to craft a strategy to fit the chart and current volatility

  • How to match expirations and strikes with my expectations of timing and strength of anticipated moves

  • How to put the odds of success on my side

  • How to effectively manage a trade once I put it into motion

Under the guidance of these best practices, I was learning how options actually work, not just discovering a single strategy that was only successful in certain market conditions.

Yet, the difficulty is that even though there are best practices that everyone should follow, trading options is still a very personal venture. I had to delve deep into myself and answer questions that only I could answer. Questions like:

  • What truly is my own tolerance for risk, both for individual positions and my portfolio as a whole?

  • Does my risk tolerance match my account size?

  • Does my risk level match my current level of knowledge of options trading?

  • How many positions can I effectively manage at one time?

  • How much time do I have or want to spend daily managing those positions?

  • What’s my timeframe? Do I have the desire and patience to stay in a trade for three to six months, like in a longer-term diagonal? Or do I want to be in and out of vertical spread trades in one to two weeks?

  • What kind of profits am I happy with? Am I content to keep hitting singles, or am I holding out for the grand slams that come much less often?

This is where the critical development of a sound trading plan comes into play — a trading plan that incorporates the best practices of options trading, which I then take, mold and refine to fit my trading personality. (Now I know why all those strategies didn’t work for me indefinitely. Their trading plans were not a proper match for me.

My trading plan is a perpetual work-in-progress because the market changes and because my trading personality is not set in stone. As my account grows, I will likely start to consider other options strategies that are not viable for me right now. And that’s fine. For me, that will always be the beauty of options trading: the elegant marriage of science with art.

By A.K. 

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