From the Journal of a Stay-At-Home Trader: Struggles on the Journey
So much of trading is mental. A newer options trader clearly should become familiar with the mechanics of options. But even after one understands those fundamentals, one can still struggle with options trading when there are certain psychological and emotional blocks that must be overcome.
Fear – Fear can come at different times in one’s options trading journey. One can experience it when moving from paper trading to trading a real account. It can come when one is looking to increase trade size. And fear can rear its head when market conditions shift, and one finds oneself trading in unknown waters. My most effective means of conquering fear has been to just take things slowly. If one has been paper trading exclusively, averaging 5 paper trades per week, one can shift the mix to 1 real trade along with 4 paper trades. In a week or so, one can shift to 2 real trades and 3 paper trades. This can go on until one becomes comfortable managing multiple real trades at one time. When looking to increase trade size, the simplest way is to increase the contract size slowly. However, one can also increase trade size by increasing the deltas. If accustomed to having 20 deltas in an underlying, one could move to 30 deltas. Of course, leverage is a double-edged sword, so one needs to gradually become used to quicker profits – and quicker losses, too. And when market conditions shift, one really needs to step back, assess the conditions, and determine the best types of strategies to increase the odds of success.
Greed – When one has had a series of successful trades, greed becomes a real temptation. If one has been exiting at a 50% profit target, it is easy to tell oneself to stay in a trade and aim for 60% to 70%. Some credit spread traders like to hang on for even 80%+. But in this market, which is so choppy and sloppy, a 50% unrealized profit can easily become a loss the next trading day. The common phrase is, “Bulls make money, bears make money, and pigs get slaughtered.” True enough, but I have found it helpful to develop a mindset of gratitude. There are not many places like the options market, where I can make a 50% return on well-managed risk in a few days, from the comfort of my desk chair, just interacting with the information on my computer screen. Even well-paid doctors and lawyers are dependent upon patients and clients coming to them. Options traders who study hard just have to boot up the computer!
Indecision – “What should I do?” is a terrible question to ask oneself after the trade has been put on. Those answers need to be determined prior to putting on the trade. As John K. likes to remind us, it is hard to think clearly when those candles are moving against us. “Should I lock in this loss? The stock just has to turn around soon!” Sometimes, it can even be hard to think clearly when those candles are moving in our direction! “Should I take the profit? What if it keeps going in my direction? I’ll miss out on more!” To counter this mindset, a trading plan is absolutely essential so one knows the stop loss and take-profit levels. If the bid-ask spread isn’t too wide, OCO orders can sometimes help here also.
Regret – Regret is related to greed. After one has exited a position for a profit, it is easy to watch a position continue to behave in one’s favor and then say: “If only I had stayed in the trade! I could have made more!” At those times, it is easy to forget that the trade could have just as easily gone the other way and erased the unrealized profits. Though it is crucial to review trades, and especially learn from trades that could have been managed in a better way, I have learned that I can’t drive forward while staring in the rearview mirror. It is better for me to say to myself, “I am grateful for 40% of the max profit,” rather than saying, “I could have made more.” It is helpful to remind myself of what Dan tells us: “It is not our job to call tops and bottoms. It is our job to extract money from the market while managing risk.”
So much of successful options trading is working on oneself.
By A.K.
