One of the first things I tell my one-on-one coaching students is the one thing I cannot teach is experience. That they must achieve on their own. And it goes without saying that common sense is not easy to come by for many individuals. But you need both to give yourself a chance to extract money from the market as an option trader.
Experience
Experience comes in so many forms. I would have to write a book instead of a blog post to include them all. If you have not noticed, there is an emotional element to trading. Only by putting on real trades can you truly gain experience regarding how you will handle situations that arise. Clearly, there will never be two trades that act exactly the same. But being able to put yourself in various situations and measuring your progress is the key to improving. As I like to say, it all boils down to management. And gaining experience managing trades cannot be overlooked.
Experience also comes in handy when trying out new strategies. I like to tell traders to paper trade at first with screenshots and get a feel for the position before putting their hard-earned money on the line. This type of experience is invaluable as well.
Common Sense
Using common sense in life goes a long way. Of course it helps in option trading too, and that is something option traders should realize. An example I often use is with implied volatility and out-of-the-money credit spreads. I will often model out a potential credit spread that brings in just over 10% of the spread and notice that the underlying was trading past my short strike a few days ago and the spread has expiration in over a week. To me, it seems crazy to take a credit spread trade like that.
Bid-ask spreads are another way common sense should be used in option trading. Wide bid-ask spreads make it harder to not only make money but often to get back to breakeven on a trade. I ask traders how wide of a spread they are willing to accept. Not only does this require common sense, but it brings experience to the table as well.
Finally
Maybe you can have some success without using common sense as an option trader, but you will definitely need experience to get there. The road may be longer and the journey rougher than expected, but it is so worth it.
