With volatility picking up in the market once again, option traders can have an instant edge. But sometimes, because of market uncertainty or wider than normal bid-ask spreads, it may be hard to profit. As you hear me say plenty of times, no position is sometimes the best position. Traders need to consider sitting on their hands and doing nothing. Just because you are not trading or trading less, however, does not mean you should do nothing. Right now (but true at any time) is a great time to review some past option trades.
All traders should have time schedules for reviewing their trades when the market is closed. But when you don’t think you are putting the odds on your side enough to warrant a position, this could be a perfect time to go a bit deeper with your review. Here is the excuse you need to get you started. I know you might have put off writing that trading plan for a long time and hopefully you have finally completed it. This is a mandatory part of your trading plan, and putting it off is not doing you any favors.
The procedure is essentially painless. The reviewing part maybe not so much. Take some screenshots of the charts and option chain when the trade is initiated. Then take a few throughout the trade and, of course, when the trade is exited. Did the trade work out as planned or did you do something that was not planned? Was it a bad trade that still profited? These are just a few of the questions you might ask yourself as you review your trades postmortem.
When you have additional time, compare different strategies and their results. You might be surprised at the findings. I certainly was in the past, and that is what formed me into the option trader I am today. You might not think you like or do well at vertical debit spreads, for example. Then after reviewing some you have done, you might find you fared better than expected and did worse on another strategy you thought you favored.
Most importantly, do this when the market is closed so your full attention can be on the review and not the active market. Even without a position on, if the market is open you may feel the need to watch a potential position. If you do this on a regular basis and not just during times that you may prefer to avoid, such as volatile conditions or earnings season, you will put yourself in a better position going forward. I can guarantee that.
Senior Options Instructor
Market Taker Mentoring, Inc.