The Options Trading Virus

The Trading Virus

This Options Revolution and Market Tamer article is best read after a substantial rise has occurred in the market following a period of sustained bearishness.  Why?  Because it is precisely the time when many will have seen the direction of the portfolios turn.  Some may even have caught the bottom in stocks like Bank of America, up 50% in less than 10 days!  When wealth is attained so rapidly, a tendency towards confidence or more particularly over-confidence is natural.  Short-term results vindicate decision-making at the bottom to ‘bet heavily’ or ‘go all in’.  And they solidify a belief that the next bottom can be called successfully also.  This may indeed occur.  But a danger exists, which I call the Trading Virus.

Infected

The Options Trading Virus affects almost every options trader.  The victim is affected soon after a successful outcome in the stock market.  The virus manifests as excessive confidence and belief in one’s ability to time the market.  For most the virus is a lifelong condition.  Bulls and bears are equally affected.  As stock markets rise, bulls are infected and ride the glorious waves higher and higher until the inevitable crash cycles around again.  And bears rarely hold out long enough in sustained bull markets to enjoy those crashing sounds.

Results-Focus

For both bulls and bears, the options trading virus implants a disease called ‘Results-Focus’.  Each is a keen market observer driven to action or inaction by the latest direction of streaming quotes, media hype, account value or some other short-term mechanism.  And a dependency is soon created; a dependency that demands information in the short-term that produces adrenalin rushes that lead to action that further lead to hopeful and expected results.  This is not to say that, in the short-term, talented options traders cannot profit. Of course, they can.  But for most, the disease is a lifelong incurable condition because something very important is overlooked – the process of wealth accumulation.

Methodology

Those successful shorter-term options traders succeed not because they are results-oriented but because they are process-oriented.  And those victims who cure themselves do so precisely because they transition from the trap of attempting to time the market perfectly all the time to creating a process that succeeds at all times.  You will quickly see at Options Revolution that we like to manage risk through hedging.  We focus on measuring the risks and rewards in the context of our trading methodology to ensure that no single position can detrimentally impact the entire portfolio so substantially that a crash leads to elimination from the game.  While losses may be suffered on occasion, our intent is to ensure that we will not suffer the ‘wipe-outs’ experienced by some other traders… (who may be considered more esteemed in the financial community by the nature of the size of their house or the parties to which they are invited!).

Your Trading Insurance

Manage risk and you can create a vaccine for the disease.  Manage risk well and a profitable, long-term trading career awaits.  Of course, this means that insurance must be purchased at times - which will end up costing money.  In the stock market, this should be accepted as part of the cost of trading successfully.  Most complain that insurance is wasted when it is not needed.  But such an argument is akin to stating that buying insurance on a home was a waste because no fire burned down the home!  Just because you have insurance against a fire doesn’t mean you want a fire to appear!  But if a fire does appear you definitely want insurance.  Be careful of falling victim to logical fallacies that are governed by emotion as opposed to reason.