Stocks and the market took a bit of a beating over the past several weeks, but they recently moved higher again. Talk about volatility! Of course, that is to be expected from time to time and is really nothing out of the ordinary if you have traded for any length of time. Even though the markets may be uncertain, there is something you should always be certain about and that is the importance of patience. Having patience as a human being and an option trader will almost always benefit you.
Being Too Aggressive
Being patient and avoiding spur-of-the-moment or gut-feeling trades is not easy to do. Even as an experienced trader the urge will be there. But having self-control and patience based on a written trading plan is the key. No matter what I talk about, I almost always bring up having a trading plan. It’s that important.
When the market sells off, as it recently did, implied volatility levels surge higher and so do option prices. Many option traders are trained and even brain-washed to think that selling put spreads is the way to go, and they see this as an opportunity to take advantage of “more expensive” premiums. But what if the market and underlying continue to move lower as they often do and just did? Options traders might sell elevated premium in such cases, but they get steamrolled by their positive delta positions.
Don’t Chase Stocks
As I say in MTM’s Group Coaching class every morning, it always pays to be patient, especially in volatile markets. What has a better chance of happening? Of course, no one can predict what the next day will bring due to markets gapping, but waiting for setups to trigger is essential. When the market is moving, traders tend to get hyped up and chase stocks instead of looking at potential support and resistance levels.
Just understanding and believing that support and resistance will fight to hold that level is a big advantage. In addition, when a stock or the market is extended higher or lower, again, ask yourself what has a better chance of happening. The answer is the underlying will not continue in that direction into the close most times. It is just that simple.
Easy but Hard Lesson
The bottom line is it all boils down to patience. But isn’t that true with many things in life? So next time you feel like you are acting on the spur of the moment, slow down and ask yourself if this is the right thing to do and the right time to enter the trade. More times than not, it probably is not. I promise you’ll thank yourself later, at least most of the time.
Senior Options Instructor